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(Name, Address, including zip code, and telephone number, including area code, of Registrant’s agent for service)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, without nominal (par) value
New York Stock Exchange*
American Depositary Shares (ADS) each representing
fifteen shares of Common Stock, without nominal (par) value
New York Stock Exchange
* Not for trading, but only in connection with the registration of ADS, pursuant to the requirements of the Securities and Exchange Commission.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. Common Stock, without nominal (par) value — 331,316,623 Shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes x No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
o Yes x No
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o
Accelerated Filer x
Non-accelerated Filer o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
o Yes o No
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
o
U.S. GAAP
x
International Financial Reporting Standards as issued by the International Accounting Standards Board
o
Other
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
o Item 17 o Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
In this annual report, references to “US$”, “US dollars” and “dollars” are to United States dollars, references to ThUS$ are thousands of US dollars and MUS$ are millions of US dollars; references to “pesos” or “Ch$” are to Chilean pesos, references to “Ch$ million” or “MCh$” are to millions of Chilean pesos; and references to “UF” are to Unidades de Fomento. The Unidad de Fomento (“UF”) is a unit of account that is linked to, and is adjusted daily to reflect changes in the Chilean consumer price index. As of December 31, 2013, one UF was equivalent to Ch$23,309.56. Percentages and certain dollar and peso amounts contained herein have been rounded for ease of presentation. Unless otherwise indicated, the exchange rate used to translate peso amounts into dollars appearing throughout this annual report is the Dolar
Observado (the “Observed Exchange Rate”) reported by the Banco Central de Chile (the “Central Bank”) on December 31, 2013, which was Ch$524.61 = US$1.00. These translations should not be construed as representations that the peso amounts actually represent such dollar amounts or could be converted into dollars at the rates indicated or at any other rate.
Our audited Consolidated Financial Statements and, unless otherwise indicated, other financial information concerning AFP Provida S.A. included in this report are presented in Chilean pesos. In accordance with the rules of the Superintendency of Pensions beginning in 2010, AFP Provida S.A. has prepared its financial statements in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standard Board (IASB).
The terms “AFP Provida”, “Provida” and the “Company”, unless the context indicates otherwise, refer to Administradora de Fondos de Pensiones Provida S.A. References to “AFP” or “AFPs” refer to private pension fund administrators in general.
The term “Authority” means the Superintendencia de Pensiones (“Superintendency of Pensions”), the principal regulator of Chile’s pension system.
The term “Banco Bilbao Vizcaya Argentaria”, “BBVA Group” and “BBVA, Spain” means the parent of AFP Provida until September 30, 2013 which currently performs this function through Inversiones Previsionales S.A. (formerly done through BBVA Inversiones Chile SA).
The term “MetLife” and “MetLife Chile Acquisition Co. S.A.” means the ultimate parent of AFP Provida since October 1, 2013, which holds its interest in Provida through Inversiones Previsionales S.A.
In this annual report and as related to Provida’s business, the term “participant” means a client that has made contributions at least once to his individual capitalization account, while “contributor” means a participant periodically making pension contributions. The term “individual capitalization account” (ICA) means for each participant the account where he or she maintains his/her mandatory savings invested in shares of the selected pension fund until the age of retirement.
This Form 20-F contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements appear throughout this Form 20-F and include statements regarding intent, belief or current expectations of our officers or our management with respect to (i) our asset growth and financing plans, (ii) trends affecting our financial condition and results of operations, (iii) the impact of competition and regulations, and (iv) our exposure to various types of market risks, such as interest rate risk, foreign exchange rate risk and market price risk. Forward-looking statements include known and unknown risks and uncertainties and are indicated by words such as “anticipate”, “believe”, “expect”,
“intend”, “risk”, “could”, “may”, “seeks”, and similar words and phrases and the negatives and variations thereof. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those described in such forward-looking statements in this Form 20-F, including, without limitation, “Item 4. Information on Provida—B. Business overview”, “Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk”.
Some factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this Form 20-F include, but are not limited to: general economic conditions in Chile and Latin America and the other countries in which we have significant business activities or investments, including the United States; the monetary and interest rate policies of the Central Bank; unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices; changes in Chilean and foreign laws, regulations and taxes; changes in competition and pricing environments; natural disasters; the inability to hedge certain risks economically; the adequacy of loss reserves; technological changes; changes in consumer spending and saving habits; and our success in managing the risks involved in the foregoing.
The forward-looking statements contained in this document are made only as of the date of this report, and we do not undertake to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
The Law for the Pension Reform N°20,255 (the “Pension Reform Law” or “Reform Law”) was enacted on March 11, 2008 and published in the Official Gazette on March 17, 2008. The first stage of the Pension Reform Law, referred to as the “solidarity principle” and directed at granting pensions and solidarity pension contributions to the country's poorest sectors, was implemented in July 2008.
In October 2008, matters relating to collective voluntary pension savings were implemented, such as a governmental subsidy to formalize the hiring of young workers, voluntary affiliation, and certain life and disability insurance (entitlement of women up to 65 years of age, entitlement of spouses to become insurance beneficiaries, and the elimination of a second determination in cases of total disability). Additionally, investment measures were implemented, such as the expanding the investment alternatives to pension funds in Chile and at the international level; gradually increasing the abroad investment limits; establishing an investment regime regulating specific matters on investments of Pension Funds by fixing limits on indirect investment and authorizing Fund Type E to invest in variable income (up to 5% of its portfolio).
One of the main changes introduced by the Pension Reform Law and implemented in 2009 was the life and disability insurance bidding process in order to: (i) increase transparency in fees charged by AFPs and in costs related to life and disability insurance; (ii) obtain a more competitive price for this insurance; (iii) correct gender inequities; and (iv) disincentive discrimination among participants, leading AFPs to focus on competence based on variables in the administration of individual accounts. Likewise, this new requirement intends to appropriately control the risks of providing life and disability insurance.
The life and disability bidding process is carried out by the AFPs as a whole. This process is ruled by regulations established by Law with bidding conditions. In this offer, any life insurers may participate provided that they are legally constituted at the bidding date. The insurance is awarded to one or more insurance companies offering the best economic offer. Awarding the insurance to more than one insurer avoids excessive risk concentration for the coverage of the entire life and disability insurance risk. The awarding criteria are established by the General Rule of the Superintendency of Pensions and the Superintendency of Securities and Insurance.
Likewise, the participants’ contributions destined to finance the insurance, expressed as a percentage of remunerations and taxable incomes, have a criterion for all the system’s participants. Although the AFPs are not responsible for financing the insurance, the premiums are collected along with mandatory contributions of participants, which are transferred to the insurance companies.
A difference due to participants’ gender may arise between the contribution to finance the insurance and the necessary premium to finance such insurance. The AFPs should transfer the difference in each of the capitalization accounts of those participants who paid a higher contribution to such premium.
In the case of bankruptcy of any awarded insurance company, the rest of the insurers would assume the corresponding risk regarding those casualties that have occurred since the bankruptcy date and until the expiration date of the contract. In the case of bankruptcy of all involved insurance companies, the State guarantees the necessary additional contributions to complete the required amount to finance the life and disability pension through the “State Guarantee”. The coverage of such guarantee is for 100% of the prevailing minimum pension and 75% over the excess of the pension with a maximum of UF 45 for each beneficiary or pensioner.
In May 2009, the first life and disability insurance bidding process was carried out for a 12-month coverage period effective on July 1, 2009. Under this new process, the insurance cost was 1.87% over the taxable remunerations of workers for all the AFPs. The second life and disability insurance bidding for a 24-month coverage period effective on July 1, 2010 was awarded at an average cost of 1.49%. The third bidding process, for a 24-month coverage period effective on July 1, 2012, was awarded at an average cost of 1.26%.
As Provida no longer provides the insurance coverage, the Company reduced the fees charged to its participants from 2.64% to 1.54% over their taxable remunerations starting on July 1, 2009.
In the case of dependent workers, the contribution to finance the insurance (additional contribution) is paid by the employer, except for dependent young workers (between 18 and 25 years) who receive pension subsidies. This obligation became effective on July 1, 2009, and a temporary grace period for workers with fewer than 100 employees ended in June 2011.
The last change of the Pension Reform Law that was implemented in 2010 was related to the bidding process to award an AFP the individual capitalization account administration of all new participants entering into the private pension system for a 24-month term. This bidding process encouraged price competition among AFPs and has led to lower fees for participants, causing greater sensitivity in price demand, favoring the entrance of new actors in the AFP industry and protecting the participants’ equity interest.
The awarded AFP is the AFP offering the lowest fee (which at the same time must be less than the fees in effect at the date of the bidding process) for a 24-month period, during which such AFP is not able to modify its fees, including those portfolios of participants already managed by such AFP.
The first bidding process was carried out in January 2010, in which AFP Cuprum S.A., AFP Habitat S.A., AFP Planvital S.A. and AFP Modelo S.A. participated. On February 1, 2010 it was announced that the awarded company was AFP Modelo, offering the lowest fee of 1.14%. AFP Modelo`s pension plan became effective on August 1, 2010, therefore, from that date onwards those dependent and self-employed workers, as well as voluntary participants that entered for the first time to the pension system of individual capitalization, had to contribute for a 24-month period in AFP Modelo. After such period, workers were entitled to move to another AFP.
In January 2012, the second bidding process to award all new participants was carried out, in which AFP Modelo, AFP Planvital and AFP Regional (which has been legally incorporated, but has not yet started operations) participated. On January 30, 2012, the Superintendency of Pensions announced that AFP Modelo offered the lowest fee of 0.77% and awarded them the administration of new participant accounts for the 24 months starting August 1, 2012.
Finally, in January 2014, the third bidding process was carried out for the administration of the pension accounts of new participants, and the AFPs competing in the process were AFP Modelo and AFP Planvital S.A. On January 27, 2014, the Superintendency of Pensions announced that AFP Planvital had presented the lowest fee commission of 0.47% and awarded AFP Plantival the administration of all new participant pension accounts for the 24 months starting August 1, 2014.
Provida considers that it possesses competitive advantages to successfully face the new conditions in the industry, given its more than 30 years of experience in the pension industry. Additionally, Provida has carried out all the processes and developments in order to fully comply with all the changes brought about by the implementation of the Pension Reform Law, as well as continued training its workers to provide the best service to customers.
The following table presents selected financial and operating information for Provida as of the dates and for each of the fiscal years indicated. The 2013, 2012, 2011, 2010 and 2009 financial information is derived from our audited Consolidated Financial Statements as of December 31, 2013, 2012, 2011, 2010 and 2009, respectively.
Our audited Consolidated Financial Statements as of and for the years ended December 31, 2013, 2012, 2011, 2010 and 2009 are prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the IASB.
The financial data as of and for each of the years ended December 31, 2013, 2012, 2011, 2010 and 2009 in the table below are presented in nominal pesos.
In general, amounts are expressed in millions of Chilean pesos except for ratios, operating data, shares and ADS data. For the convenience of the reader, all data presented in dollars in the following summary, from and at the end of the year ended December 31, 2013, are translated at the Observed Exchange Rate for December 31, 2013 of Ch$524.61 per US$1.00. These translations should not be construed as representations that the Chilean peso amounts actually represent such dollar amounts or could be converted into dollars at the rates indicated or at any other rate.
Weighted average number of shares outstanding (in thousands)
331,317
331,317
331,317
331,317
331,317
Consolidated Statement of Financial Position
IFRS:
Current assets(7)
62,976
100,447
70,253
61,967
57,069
Mandatory investment
234,929
217,072
201,418
204,526
179,129
Property, plant and equipment
23,703
26,383
27,787
28,660
29,641
Total assets(7)
355,996
387,230
373,538
370,312
339,152
Equity
242,007
314,674
304,780
293,994
269,378
(1)
Revenues from operations include revenues from fee income, gains (losses) on mandatory investments and other revenues.
(2)
Expenses from operations include life and disability insurance premium expense, employee expenses, depreciation and amortization, impairment losses and miscellaneous other operating expenses.
(3)
Other income (expenses) include finance costs, financial income, share of profit (loss) of associates accounted for using equity method, exchange differences and other non-operating income and expenses.
(4)
Profit per share and per ADS data have been calculated on the basis of the weighted average number of shares outstanding during each fiscal year.
(5)
Calculated on the basis of one share per ADS. Dividends per share and per ADS in Chilean pesos represent actual dividends paid to December 31, 2013.
(6)
Dividends per share and per ADS in US dollars have been calculated by translating the Chilean pesos paid into US dollars using the Observed Exchange Rate as of the date of each respective payment.
(7)
Current assets and Total assets for 2012, 2011, 2010 and 2009 reflect the reclassifications as described in Note 4 in the Financial Statements and effected therein as of December 31, 2013 and 2012 for current and deferred taxes.
The following table sets forth, for the periods and dates indicated, certain information concerning the exchange rate between the Chilean peso and the US dollar. Such exchange rates are provided solely for the convenience of the reader and are not necessarily the exchange rates used by the Company in the preparation of the audited Consolidated Financial Statements included in this annual report. No representation is made to the effect that the Chilean peso could have been, or could be, converted into US dollars at the exchange rates indicated below or at any other exchange rate.
Nominal Rate of Exchange
(Chilean pesos per US$1.00)
Year
Average
High
Low
2009
559.67
643.87
491.09
2010
510.38
549.17
468.37
2011
483.57
533.74
455.91
2012
486.59
519.69
469.65
2013
495.23
533.95
466.50
Source: Central Bank.
Nominal Rate of Exchange
(Chilean pesos per US$1.00)
Months
Monthly Average
High
Low
October 2013
500.96
508.58
493.36
November 2013
520.35
529.64
507.64
December 2013
529.20
533.95
523.76
January 2014
538.36
553.84
527.53
February 2014
554.69
546.94
563.32
March 2014
563.45
563.24
550.53
Source: Central Bank.
According to the latest information published by the Central Bank at the date of issuance of this report, the exchange rate on April 25, 2014 was Ch$560.36 per US$1.00.
In addition to the information contained in this annual report, prospective investors should carefully consider the risks described below and the other information contained in this annual report. Provida’s business, financial condition or results of operations could be materially and adversely affected by any of these risks.
The economic situation in Chile significantly affects Provida’s results
The main source of Provida’s revenues from operations comes from the monthly fees charged to its contributors for mandatory contributions made in their individual capitalization accounts, which are compulsory for every salaried worker as long as there is a labor contract in force. These represented 84.2% of the total revenues from operations for the year ended December 31, 2013. As a result, the economic situation in Chile related to economic activity indicators and employment conditions significantly affects the Company’s results.
Macroeconomic conditions affect the financial capacity of employers and/or entrepreneurs, which might produce a drop in the number of employee contributors or a lack of capacity for creating new jobs, and decrease the salary of workers. Therefore, both variables—number of employee contributors and average salary—determine the salary base of the contributors and affect the Company’s results. An increase in the unemployment rate negatively affects Provida’s results and, depending on its magnitude, the impact could be significant.
Additionally, Provida’s financial condition and operations results could also be adversely affected by changes in the economic policies implemented by the Chilean Government, political or economic developments in Chile or those affecting Chile. Changes in the development of the Chilean economy could adversely affect Provida’s ability to develop its business strategy.
It is important to note that natural disasters occurring in Chile, (i.e. an earthquake, such as the one that occurred on February 27, 2010) could be another factor affecting the country's economy and thus Provida's results if they affect the unemployment level in the country, result in tax increases or cause significant damage to Provida’s assets.
Pension funds are global investors, which are affected by the economies of neighboring countries as well as by worldwide economic development
Pension funds, such as those managed by Provida, are global investors and are therefore affected by both the economies of neighboring countries as well as by worldwide economic factors. In recent years, pension fund returns have been subject to volatility in international and local financial markets, where foreign investments represented 42.6% of Provida’s total assets under management for the year ended December 31, 2013.
The Pension Reform Law increased the percentage of investments which AFPs are allowed to make abroad, from a range between 30% to 45% to a range between 30% to 60% during the first twelve months following the enactment of the Pension Reform Law (from October 1, 2008 to September 30, 2009); and between 30% to 80% after the thirteenth month (October 1, 2009). In September 2008, the Central Bank gradually increased the maximum investments limits abroad: 45% as of October 1, 2008, 50% as of December 1, 2008, 55% as of April 1, 2009 and 60% as of August 3, 2009. In November 2010, the
Central Bank increased again the maximum global investment limit abroad from 60% to 80%, gradually increasing as follows: 65% as of December 1, 2010, 70% as of March 1, 2011, 75% as of June 1, 2011 and 80% as of September 1, 2011.
Such increases permit pension funds to have new investment opportunities, which could improve the diversity of their investment portfolios, but at the same time increase the potential exposure to the international markets of the total assets managed by the AFPs.
The worldwide economy could affect Provida’s returns obtained on mandatory investments and therefore its net profit.
Provida has limitations on significantly increasing its market position
According to official statistics released by the Superintendency of Pensions, Provida has maintained a leading position in the private pension system since its incorporation, which has led to a market share of 35% in terms of number of participants and 28% in terms of assets under management. Given its position in this market and its relative size, it is highly probable that competitors will take steps toward attracting participants from Provida and persuading them to transfer their funds and make contributions to other AFPs, limiting Provida from significantly increasing its market share. A decrease in Provida’s participant portfolio could have a negative impact on its revenues from operations.
Provida is limited in its ability to improve the performance of its assets under management
Provida’s assets under management totaling MCh$23,821,383 (US$45.5 billion) as of December 31, 2013 are very large with respect to the size of the local capital market measured by its total capitalization. This reduces Provida’s flexibility to significantly modify its portfolio structures, and consequently to improve the return offered to its participants. Additionally, in situations of instability or uncertainty in the markets, Provida’s reactive capacity is likely to be limited. In this context, Provida cannot ensure that it will be able to maintain a sufficient rate of return on its pension funds to decrease the number of participant transfers. Any decrease in Provida’s participant portfolio could have a negative impact on its revenues from operations.
Additionally, if pension fund returns managed by Provida do not achieve the legal minimum return established by law, due to any instability or uncertainty in capital markets as described above, the Company could lose part of its mandatory investments aimed at covering this difference. See “Item 4. Information on Provida—B. Business overview—Principal activities—Investment services for participants’ contributions in the pension funds”. This portion must be replenished in a maximum term of 15 days to fulfill the legal requirement to maintain a reserve equal to 1% of the value of each pension fund under management and to continue with its business with the consequent reduction in the Company’s equity.
Provida operates in a regulated market in which its flexibility to manage its business is limited
Provida’s operations are regulated by the Pension Law and, to the extent applicable, Chilean corporation law. The Pension Law defines the scope of the business of pension fund administrators, which only permits Provida to engage in the administration of its pension funds and the rendering of related benefits. Provida is also authorized to establish local related corporations that may complement its line of business or invest in pension fund administrators or entities located in other countries whose business is related to pension matters.
Regarding pension fund investments, Provida must invest such assets in accordance with the types of instruments and within the ranges of assets and maximum percentages allocated per investment and fund type authorized by the Pension Law.
In addition, the Pension Law requires each AFP to maintain a minimum reserve fund known as mandatory investment equal to 1% of the value of each pension fund under management in order to provide a minimum return on investments for each of its pension funds. This minimum return is based on a weighted average of the return by all pension funds in the AFP system in a 36-month period. This requirement has been designated in accordance with different portfolio compositions, giving those with a higher component of variable income and therefore higher volatility (funds Type A and B), a larger margin to achieve the requirement. If a fund’s return for a certain month is lower than the minimum return, the AFP must cover the difference within a 5-day period. To do so, the AFP is permitted to apply funds from the mandatory investments, and in that event, such amount must be refunded within 15 days. In accordance with the Pension Law,
if an AFP fails to comply with either the minimum return requirement or the minimum reserve fund requirement, it may eventually be required to be dissolved. See “Item 4. Information on Provida—B. Business overview—Principal activities—Investment services for participants’ contributions in the pension funds”.
The Pension Reform Law increased the investment limits for the pension funds. However, Provida cannot ensure that it will be able to fulfill minimum return requirements or the minimum reserve.
Provida’s business and results of operations may be affected by changes in laws, regulations or Chilean Government proposals
On January 16, 2008, the Pension Reform Law in relation to the private pension system was approved and was published as the Republic Law (N° 20,255) in the Official Gazette on March 17, 2008. The first changes started to be implemented on July 1, 2008. Changes introduced by the reform can be summarized in four areas: coverage improvement, new industrial organization, investments and new institutional framework.
As a result of the implementation of the Pension Reform Law, there is a bidding process of all new participants entering the system every two years beginning in July 2010 and for a 24 month period, to the AFP offering the lowest variable fee is awarded the new participant`s accounts. This fee must be lower than the lowest fee operating in the industry and must apply to the AFP’s entire portfolio and not only to the portion awarded.
Provida’s management believes that the approved reform consolidates the current private pension system and provides an adequate legal framework for AFPs to continue developing their activities. In reference to the coverage improvement, Provida believes that this implies a new business opportunity for AFPs. Additionally, Provida believes that the flexibility of investment alternatives makes increased competition possible.
However, future changes in laws or regulations in Chile may have a negative effect on Provida’s financial results.
In addition, Provida is subject to changes in tax laws. Reflecting the above, in September 2012 Chile implemented a new tax law maintaining the applicable tax rate at 20% instead of lowering the rate to 18.5% for 2012 and 17% from
2013 thereon, as established in a previous change in tax law made in 2010. Further increases in applicable taxes, or other negative tax treatment, could have a negative effect on Provida’s financial results.
The risk of a higher casualty rate and the consequent effect on expenses from operations is subject to the fluctuation of interest rates for life annuities and the returns achieved by pension funds
In terms of expenses from operations, life and disability insurance has represented a significant source of expenditures for the Company. Life and disability insurance is considered a long-term obligation because the benefits to disabled participants are rendered following the final disability determination test, which is three years after the initial disability determination (partial disability is defined as a decrease between one half and two thirds of one’s working capacity). Until October 2009, the total disability benefits (total disability is defined as a decrease in more than two thirds of one’s working capacity) were also granted three years after the initial disability determination.
Before the changes introduced by the Pension Reform Law, including the bidding process for life and disability insurance by all the AFPs in July 2009 (see “Item 3. Key Information —Recent Regulatory Changes”), Provida was legally obligated to provide life and disability benefits by individually contracting compliant insurance.
Even though the Pension Reform Law eliminated the AFP’s individual obligation regarding the coverage of casualties beginning on July 1, 2009, by awarding the life and disability administration to a group of insurers, the obligation of those casualties pending payment due to temporary disability under coverage as of June 30, 2009 will remain as Provida’s.
At the moment that the final disability determination is made, the AFP is obligated to cover any shortfall equivalent to the difference between a participant’s savings in his/her individual capitalization account and the benefits granted to him/her by law. These benefits relate to the present value of the life annuity pension discounted by the life annuity rates in force at the time of the payment. Such pension will be equivalent to a percentage of the participant’s average taxable remuneration for the last ten years depending on the decrease of his/her working capacity: i.e., 50% of his/her taxable income in case of experiencing a loss of between one-half and two-thirds of working capacity, and 70% of his/her taxable income in case of experiencing a loss of more than two-thirds of working capacity. As a result, changes in interest rates impact the final value of an AFP’s payment obligations.
According to the last insurance contract policy with coverage effective between January 1, 2005 and June 30, 2009, between Provida and BBVA Seguros de Vida entered into before the implementation of the Pension Reform Law, the Company had the obligation to make additional premium payments if the casualty costs were greater than the temporary payments, up to a maximum amount previously defined. The risk of a greater casualty cost and its consequent effect on the Company’s expenses from operations was subject to the returns of life annuities and pension funds beginning on
July 1, 2009, factors that had an inverse relationship with the economic cost of casualties. Therefore, the Administrator could be forced to pay additional contributions if such factors deteriorate and result in a negative effect.
Provida requested BBVA Seguros de Vida, in conformity with the new regulation, to value reserves at the prevailing market interest rate instead of a historical interest rate (defined as the minimum interest rate of the previous semester) so that the Company’s liability would more accurately reflect the amount that would be effectively paid (i.e. fair value). Moreover, by mutual consent of the parties (previous compensation to the insurer for change in conditions), the financial performance of cash flows surplus was modified with a benchmark determined by assets of similar duration to that of the insurance liability.
In view of changes made in the management of assets and liabilities associated with the life and disability insurance, AFP Provida has mitigated the risk associated with interest rate fluctuation.
As of December 2013, the Company continued recording its obligations for this concept at fair value in accordance with the casualty model that considers the future evolution of relevant variables under prudent scenarios, which might include constituting higher provisions than those required by law that correspond to the surplus of the insurers’ balance sheets. Provida recorded an expense in its provisions for unfavorable casualty rate of MCh$1,940 as of December 31, 2013, primarily due to the constitution of reserves for possible survival claims that may arise related to deceased participants that were paid disability pensions (MCh$3,478) as of December 31, 2013.
Provida is exposed to the credit risk of the insurers such that the risk of failure of an insurer to pay any required shortfall amount is borne by Provida
Under the Pension Reform Law, the Pension Fund Administrators together must purchase insurance for their affiliates, called life and disability insurance (SIS). The right to provide such insurance is awarded through a bidding process, which is carried out by all AFPs.
In the case of bankruptcy of all involved insurance companies, the State guarantees the necessary additional contributions to complete the required amount to finance the life and disability pension through the State guarantee. The coverage of such guarantee is 100% of the prevailing minimum pension and 75% of the excess of the pension with a maximum of UF 45 per month (MCh$1 approximately) for each beneficiary or pensioner.
Administradora de Fondos de Pensiones Provida S.A. is a corporation formed under the laws of Chile. Its deed of incorporation was executed on March 3, 1981 and was registered in the Registry of Commerce in Santiago of Chile on April 6, 1981, under number 6,060, subsection 3,268. Provida’s by-laws specify that the Company shall have a duration of one hundred years, beginning on the date on which its existence was authorized. Provida’s registered office is located at 100 Pedro de Valdivia Avenue, 16th floor, Providencia, Santiago, Chile. Provida’s telephone number at that location is (56-2) 2351-1200 and its website is www.provida.cl.
Provida is one of the oldest private pension fund administrators operating in Chile, maintaining a leading position in the Chilean private pension industry since its incorporation. As of December 31, 2013, according to official statistics released by the Superintendency of Pensions, Provida was the largest of the six AFPs operating in Chile in terms of the number of participants, contributors, assets under management, participants’ salary base and number of branch offices. The Chilean private pension system was created in May 1981, when Decree Law 3,500 of November 13, 1980 (the “Pension Law”) was implemented to replace the prior social security system. Subsequently, on March 11, 2008 the Pension Reform Law was promulgated in order to improve the pension system, reinforcing the solidarity character of the system, extending
its coverage, increasing competitiveness in the industry and boosting gender equality.
At the end of the 1990s and in order to reinforce its competitive position, Provida, like other major AFPs, engaged in a merger process with smaller and less efficient AFPs, in an attempt to increase market share and achieve greater economies of scale. Provida purchased and merged with AFP Unión S.A and AFP Protección S.A. in 1998 and 1999, respectively. Provida has sustained an increase in its market share through these acquisitions with growth in its market shares from 29% before the mergers to 35% in 2013 in terms of participants and from 20% before the mergers to 28% in 2013 in terms of total assets under management.
Since 1993 Provida has participated in establishing private pension systems in other countries in Latin America, achieving at the end of the 1990s equity interests in AFPs in Peru, Ecuador, Mexico, El Salvador and Colombia through its subsidiary, Provida Internacional. In 1999, the BBVA Group purchased a controlling interest in Provida and since 2001 the Company participated with BBVA Group under a joint strategy to boost the aggregate pension holdings in Latin America.
In 2001 Provida Internacional sold its interest in the Mexican company AFORE Profuturo S.A. de C.V., a sale that allowed Provida to complete the consolidation of its strategic position in Mexico, along with the BBVA Group after the purchase of a 7.50% equity interest in AFORE Bancomer S.A. de C.V. (“AFORE Bancomer”). Additionally, in September 2001, Provida became the owner of 100% of the shares of AFP Génesis S.A., which had a leading position in the Ecuadorian fund management industry. Since then, AFP Génesis’ financial statements have been consolidated with those of Provida.
In 2003, Provida sold its equity interest in AFPC Porvenir S.A. in Colombia to the Sarmiento Group, the controlling shareholder of such administrator. This decision was based on the fact that the Colombian market had matured and was undergoing changes in regulations and the fact that Provida did not have management control of the company while the BBVA Group had a controlling position in another administrator, AFPC Crecer. In conjunction with the
above transaction, Provida acquired a 100% equity interest in AFP Porvenir S.A. in the Dominican Republic from the Sarmiento Group and the minority shareholders with the expectation of the future merger with BBVA Crecer, the AFP of the BBVA Group in that country.
In May 2004, Provida sold its 30.00% equity interest in AFP Porvenir in the Dominican Republic to the local investor Progreso Group retaining a 70.00% equity interest to carry out the merger process between AFP Porvenir and BBVA Crecer, in which the BBVA Group held a 70.00% equity interest. Following the merger, Provida and the BBVA Group each held a 35.00% equity interest in AFP Porvenir and the remaining 30.00% was held by the Dominican financial investor Progreso Group. Also in October 2004, Provida Internacional sold its equity interest in AFP Crecer in El Salvador to Fondo Universal S.A. de C.V, due to moderate growth perspectives for that mature market.
In 2007, Provida Internacional sold 10.00% of its equity interest in BBVA Crecer AFP S.A. to one of the companies of the Vicini Group, retaining a 25.00% equity interest in such AFP. In December 2007, Provida Internacional sold the remaining 25.00% equity interest to the Bank of Nova Scotia of Canada, as a result of which Provida Internacional no longer has an equity interest in that company.
On May 24, 2012, the former ultimate parent of AFP Provida, Banco Bilbao Vizcaya Argentaria S.A. (“BBVA S.A.”), disclosed it had decided to initiate a study of strategic alternatives for its mandatory pension business in Latin America. Among the alternatives considered was the sale of all or part of its AFPs in Chile, Colombia and Peru, and the Administradora de Fondos Para el Retiro (Administrator of Retirement Funds) AFORE in Mexico.
In connection with the aforementioned process, in November 2012, Provida Internacional agreed to sell its entire 7.5% stake in BBVA S.A.’s Mexican affiliate Administradora de Fondos Para el Retiro Bancomer, S.A. de C.V. ("AFORE Bancomer”), to AFORE XXI Banorte, S.A. de C.V. The closing of this transaction occurred on January 9, 2013. As determined by resolution of both Provida Internacional's Board of Directors and the Extraordinary Shareholders’ meeting on November 27, 2012, this transaction was considered favorable to Provida’s interests, both from an economic point of view and in consideration of the purpose and core business for which Provida Internacional was incorporated. Provida Internacional's Board of Directors and the Extraordinary
Shareholders’ meeting concluded that its investment in AFORE Bancomer had over time become a passive investment. For this reason and considering future projections for AFORE Bancomer as well as other factors, the proposed sale to AFORE XXI Banorte, S.A. de C.V. of Provida Internacional's 7.5% stake in AFORE Bancomer was deemed by Provida Internacional's Board of Directors and the Extraordinary Shareholders’ meeting to be in the best interests of the company.
Subsequently, in January 2013, Provida Internacional approved the sale of its entire 15.87% stake in BBVA’s Peruvian affiliate Administradora de Fondos de Pensiones Horizonte S.A. ("AFP Horizonte"), to a company in the BBVA Group to be designated by BBVA S.A. This transaction was consummated over the Lima Stock Exchange via a trade on February 27, 2013 with BBVA S.A.’s affiliate Corporación General Financiera S.A. The sale of Provida Internacional’s interest in AFP Horizonte was approved by Provida Internacional’s Board of Directors and the Extraordinary Shareholders’ meeting on January 23, 2013, because it was considered to be in the corporate interests of AFP Provida and Provida Internacional, both economically and in consideration of the purpose and core business for which Provida Internacional was incorporated. Provida
Internacional’s Board of Directors and the Extraordinary Shareholders’ meeting concluded that its investment in AFP Horizonte had over time become a passive investment. As this was a related party transaction for Provida Internacional at that moment, and Provida Internacional is a subsidiary of a publicly held corporation, the rules established by the Companies Law with respect to the conduct of related party transactions were followed. In particular, an independent third-party valuation was obtained, and the transaction was reviewed by AFP Provida’s management and Board of Directors and was approved by the Extraordinary Shareholders’ meeting of Provida Internacional.
Regarding local investments, Provida became a shareholder of Investment DCV (“DCV”) in 1993, a company whose main purpose is to invest in entities engaged in offering securities to the public and in which Provida held a 23.14% equity interest as of the filing of this annual report.
Since 2000, Provida has been a shareholder in PreviRed.com (“PreviRed”), a company that provides electronic collection services for pension contributions. As of the filing of this annual report, Provida held a 37.87% equity interest in PreviRed.com.
In 2002 a consortium composed of AFPs Provida, Habitat, Cuprum, Capital and Planvital was awarded the administration of Unemployment Insurance through a new company called Administradora de Fondos de Cesantía de Chile S.A. (“AFC”), in which Provida held a 49.20% equity interest until 2013, when AFC acquired shares from AFP Habitat and distributed among all the rest of AFPs, thus they increased their equity interests over the shares with economic rights.
In April 2012, it was carry out the second bidding process regarding the administration of unemployment insurance, being awarded to the Grupo Nueva Providencia II, a group composed of AFP Cuprum, AFP Capital, AFP Planvital and BBVA Rentas e Inversiones Limitada. The new company called Administradora de Fondos de Cesantía de Chile II, in which Provida does not hold any equity interest, began to operate on October 7, 2013, meanwhile the company Administradora de Fondos de Cesantia de Chile (AFC I), in which Provida holds equity interest, ended its operations from that date and is currently under process of liquidation, which shall not exceed more than three years, and which will be completed upon final approval of the Superintendency of Pensions.
On July 19, 2013, the Superintendency of Pensions authorized the entity MetLife Chile Acquisition Co. S.A. and Inversiones MetLife Holdco Tres Limitada to jointly acquire (direct and indirectly the first entity, meanwhile indirectly the second entity) up to 100% of the shares of Administradora de Fondos de Pensiones Provida S.A.
MetLife Chile Acquisition Co. S.A. (the "Bidder") declared that its tender offer in Chile, for up to 100% of common shares of a single series, with no par value, fully subscribed and paid, issued by the Company ("Share" or "Shares") in the terms specified in the initial notice published in the newspapers El Mercurio and La Tercera on August 28, 2013 (“Offer in Chile”), was successful. The Bidder received acceptances of the Offer in Chile for a total of 58,949,845 shares, representing 17.79% of the total shares of Provida. Such shares were acquired at US$6.1476 per share.
Additionally, the Bidder conducted a tender offer in the United States for 100% of the shares held by U.S. holders, and up to 100% of the shares represented by American Depositary Shares ("ADSs") held by all holders of ADSs, wherever located ("Offer in the U.S."). The Company was informed that the Bidder received acceptances for 4,631,368 ADSs, representing 69,470,520 shares, and additionally, it received acceptances for 220,508 ADSs representing 3,307,620 shares under the mechanism of "guaranteed delivery" as defined in the United States Securities Exchange Act (the "Exchange Act"), which have been accepted for payment subject to fulfillment of the requirements of such mechanism. Such ADSs were acquired at US$92.2140 per ADS.
Finally, as agreed in the "Transaction Agreement", signed on February 1, 2013, among Banco Bilbao Vizcaya Argentaria S.A. ("BBVA"), BBVA Inversiones Chile S.A. (together with BBVA, the "BBVA Parties"), MetLife, Inc. ("MetLife") and the Bidder, the Company was informed that on October 1, 2013 (the “Closing Date”), the BBVA Parties had transferred to the Bidder total control over all the shares issued by the Chilean closely held corporation called Inversiones Previsionales S.A. (“Inversiones Previsionales”), Chilean Tax ID No 76,266,631-6, less one of these shares which was transferred to Inversiones MetLife Holdco Tres Limitada, Chilean Tax ID No 76,265,745-7, thereby indirectly transferring on that date
to the Bidder, control over 171,023,573 shares (representing approximately 51.62% of the Shares) held directly by Inversiones Previsionales.
As a result, as of the Closing Date, the Bidder became, directly and indirectly, the owner and controlling shareholder of 299,443,938 shares (including shares represented by ADSs and 46,445 shares of which were indirectly held by MetLife before the tender offers were commenced, which were sold to the Bidder in the Offer in Chile), representing, in the aggregate, 90.38% of the shares of Provida.
As of the closing date of the Offer in the U.S.A., the number of shares directly or indirectly held by the Bidder increased by 3,305,385 shares, purchased under the mechanism "guaranteed delivery" as referred to in the Exchange Act. Therefore, MetLife Chile Acquisition Co. S.A. held a 91.38% stake in AFP Provida (through Inversiones Previsionales S.A. and ADSs) as of December 31, 2013.
As reported in the prospectus for the Offer in Chile, the ultimate controlling shareholder of the Bidder, and therefore of Provida as of October 1, 2013, is MetLife, Inc. a New York Stock Exchange listed company duly incorporated in accordance with the laws of the State of Delaware, U.S.
On March 31, 2014, Chilean President Michelle Bachelet submitted a new tax reform bill to Congress. The bill has four main objectives: (i) increase tax revenue in order to finance government programs and pay down the fiscal deficit, (ii) more equitably distribute tax burdens, (iii) create new and more effective incentives for saving and investment and (iv) reduce the rate of tax evasion. The bill seeks to increase tax revenues by 3% of GDP, 2.5% from changes to the tax structure and 0.5% from reduction in tax evasion. The bill’s main reforms include an increase of the corporate income tax rate to 25 % within 4 years (21% in 2014, 22.5% in 2015, 24% in 2016 and 25 % in 2017) and the elimination by 2018 of the Accumulated Tax Profit Fund (Fondo de Utilidades Tributables), which allows corporations to defer taxes on business profits until they are distributed, and a shift to accrual-based
taxation. Congress is expected to vote on and pass the bill by May 21, 2014.
Capital expenditures and divestitures
In 2013, 2012 and 2011, aggregate capital expenditures totaled MCh$9,987 (approximately MUS$19) and divestitures totaled MCh$99,679 (approximately MUS$190), primarily due to the disposal of equity interests held in AFORE Bancomer and AFP Horizonte.
In 2013, capital expenditures were MCh$1,936 mainly related to investments in facilities and branch offices restructurings and purchases of computer equipment and software. Moreover, capital divestitures were MCh$95,521 and were related to sales of equity interests held in AFORE Bancomer in Mexico and AFP Horizonte in Peru, and the sale of properties that were not being used by AFP Provida.
In 2012, capital expenditures related to investments in property, plant and equipment made in the ordinary course of business were MCh$4,381, mainly due to construction and real estate costs and the purchase of computer equipment and software. Likewise, capital divestitures were MCh$3,247 and were related to sales of property, plant and equipment specifically construction and real estate.
In 2011, capital expenditures related to investments in property, plant and equipment made in the ordinary course of business were MCh$3,670, primarily due to the installation and restructuring of branch offices and the purchase of computer equipment and software. Capital divestitures related to sales of property, plant and equipment were MCh$911 and were specifically sales of real estate.
The following table sets out information corresponding to capital expenditures and divestitures for the years ended December 31, 2013, 2012 and 2011:
Chilean AFPs are regulated by Law Decree 3,500 and by the Superintendency of Pensions. In order to commence operations, an AFP must hold a minimum capital equal to UF 5,000 (approximately ThUS$220), which increases based on the number of participants up to UF 20,000 (approximately ThUS$890) for AFPs with over 10,000 participants. The Administrators must maintain at all times shareholders’ equity equal to at least the minimum capital required. If shareholders' equity of an AFP is reduced to an amount lower than the minimum required, the AFP shall be required to make up the difference within six months every time that this occurs. If an AFP is not able to do so, the Superintendency of Pensions would revoke the AFP’s authorization of existence and liquidate it.
The AFPs are required by law to be single-purpose companies authorized to provide the following services:
collection and management of contributions made by participants;
-
investments of participants’ contributions in pension funds managed by the AFP;
-
provide life and disability benefits for participants; and
-
provide a senior pension for participants.
Services of collection and management of contributions made by participants
The services provided by the AFPs in connection with collection and management of contributions include mandatory contributions and voluntary contributions made by its participants.
Regarding mandatory contributions and in accordance with the Pension Law, each dependent worker and participant of Provida must contribute 10% of his/her taxable salary into his/her individual capitalization account. Such contributions are deducted from the participant’s salary and are used to purchase shares of some of the five types of funds that Provida manages. These funds are legal entities separate from Provida as Administrator.
The Pension Reform Law established the requirement for self-employed workers to make contributions of 10% of their remunerations. Such requirement became effective beginning on January 1, 2012 and from that date onward, self-employed workers must gradually make contributions based on 10% out of 40% of their salary in 2012, 10% out of 70% of their salary in 2013 and 10% of their total salary during 2014, equating to the contribution of dependent workers. However, for each of these years, the self-employed worker may waive this requirement if he expressly declares. Commencing on January 1, 2015, there is an obligation to make contributions based on 100% of the salary without the possibility of waiving. Additionally, the new regulation incorporated the concept of a “voluntary participant”, which refers to any individual
who does not engage in a remunerated activity but decides to make pension contributions for his/her retirement.
Provida collects monthly mandatory contributions that are withheld from the salaries of Provida’s participants by their employers and those contributions from Provida’s self-employed participants and voluntary participants. Those monthly contributions are credited into each participant’s individual capitalization account. In the case of dependent workers, each employer must provide Provida with a monthly payroll listing all its employees who are participants of Provida, identifying the payments being made on behalf of each employee for pension contributions, both mandatory and voluntary. Self-employed workers prepare and submit their own payrolls. The voluntary participants may prepare their own payrolls or another person may do so on their behalf. In order to expedite the preparation, dependent workers whose spouses are voluntary participants can grant authorization to their employers to deduct the contributions to be added
to their spouses’ from their salaries. In all cases, the payroll, along with the checks or cash for the total contribution, must be submitted to any Provida branch office or any designated collection agent. Checks and cash deposited in banks and payrolls are submitted to the operational center in the city of Santiago for processing. Additionally, pension contributions may also be paid online at websitewww.previred.cl.
Each AFP also administers an individual and private indemnity account in the fund for household workers (such as housekeepers).
Provida offers its participants the option to establish a voluntary savings account into which they may deposit additional funds to be invested in the elected pension fund. Because this voluntary account is not designated as pension savings but free disposal, the participant may make deposits into his/her account as often as desired and is able to make withdrawals up to six times a year with no amount restriction. Currently, Provida charges a variable fee of 0.92% per month on an annual basis over the administered funds. This account is kept open in the pension fund registers, regardless of its account balance status.
Finally, voluntary pension savings correspond to additional amounts of contributions that each worker may add to improve his future pension. The maximum voluntary monthly contribution with associated tax benefits is UF 50 (approximately US$2,220). If these funds are withdrawn for uses other than pension, the amount withdrawn will be charged a higher tax rate applicable to each particular case.
AFPs are entitled to charge a fee over funds of voluntary pension savings and for collection of such funds for other institutions. Currently, Provida charges a monthly fee equivalent to 0.56% on an annual basis over accumulated funds and has established a fee of Ch$1,250 (approximately US$2.38) for fund transfers collected for other financial institutions.
As a way to improve the volume of participants’ contributions and therefore the coverage of the private system, the Pension Reform Law incorporates the alternative of Collective Voluntary Pension Savings (“APVC” in its Spanish acronym) that corresponds to a contract to be agreed between the employer and his workers and the AFP or an authorized institution. This APVC is financed in a joint manner, because the employers agree to contribute a percentage of the savings made by employees who voluntarily select this type of contribution. The conditions of the APVC administration contract are agreed between the employer and the AFP or the authorized institution. In order to promote this type of contribution, tax incentives have been established
for workers.
Investment services for participants’ contributions in the pension funds
The general investment policy of the pension funds is determined by Provida’s Board of Directors. In the process of management’s investment decisions, the following committees of Provida are involved:
- Committee of Investment and Conflict of Interest Resolution of AFP Provida’s Board of Directors. This committee consists of three directors; two of them must be “autonomous” according to the criteria established in the Pension Reform Law, the President being one of the autonomous directors. Its functions are, among others: to design an investment policy and a risk profile for each fund type; to supervise the fulfillment of the investment policy approved by the Board of Directors and the investment limits of pension funds established by law; to review objectives, policies and procedures to and from the administration of the investment risk in the pension funds; to examine information regarding operations of the pension funds with derivative instruments, foreign investments (equities, fixed income and currencies) and related companies and to approve investments in any new kind of asset.
- Committee of Investments and Risks. This committee is comprised of the Chief Executive Officer, the Chief Investment Officer, Risk Manager and other executives that might be designated. The responsibilities and attributions of this committee are, among others: to review the different measures of risk-return presented by the Risk Management; to approve different issuers, counterparts, mutual funds agencies and agents, etc., proposed by the Investment Management Area; to take notice of any event or contingency that might affect the equity of pension funds and to review situations associated with penalties and warnings; among others.
The organizational structure and the clear definition of the powers vested, attributions and responsibilities play an important role in the investment process. The structure is designed to fully develop the staff’s abilities and the optimum implementation of the investment policy in order to reach the proposed goals, managing the complexity of different instruments and markets in which the different type of funds are invested in, and the appropriate management of financial and operative risks faced by them.
For this, the responsible party for asset management is the Investment Area, which includes Variable Income Management, Fixed Income Management, Alternative Assets & Strategy Management and Middle Office Deputy Management, all of which report directly to the Chief Investment Officer. These Units include full-time research analysts with experience in investments, economics and securities. Provida also receives external advisory services provided by domestic and international consultants who provide advice to the Investment Area on trends and developments affecting the value of current and potential investments.
In Chile, all secondary market trading by AFPs must be executed in the formal trading markets either through a securities exchange or a competitive bidding process. Potential investments are validated on a daily basis by Provida’s Department of Administration and Valuation, which is part of the Financial Control Deputy Management’s Back Office Unit under the Company’s Planning and Financing. Additionally, this unit has the obligation of disclosing to the Superintendency of Pensions a daily report of all investment activities.
It is important to note that since 2006, Provida has a quality certification in accordance with the ISO 9001-2000 Norm, which has been renewed periodically. The last renewal was made in December 2012 and includes the period between January 2, 2013 and January 1, 2016 provided that surveillance audits become satisfactory. This certification includes investment processes made by the Money Market Desk, which is part of the Investment Area, and also tasks related to registration, valuation, custody, payment and control of investments executed by the Back Office Unit, as part of the Financial and Investment Control Deputy Management, which belongs to Planning and Financing Management; as well as tasks performed by the Accounting Pension Fund Department, which is part of the Account Deputy Management also belonging
to the Planning and Financing Management. The Middle Office Deputy Management is also included in, the Investments Area, which acts as an
intermediary and coordinator between the Money Market Desk, the Back Office Unit and the Financial Risk Deputy management, reporting to Risk Management, which is responsible for establishing principles, and general guidelines in terms of good practices that AFP Provida should adopt in relation to managing their risks.
The general objective of Provida’s investment activity is to administer the investment portfolios composed of the participants’ contributions in order to obtain the highest possible return for the level of risk and terms of these participants’ profiles. For this and according to the current regulation, the participants have five fund types, which seek to maximize the expected pension value according to their specific risk profiles.
To aid the participants in making the best choice, Provida seeks to ensure that at all times, the five fund types (fund Type A, B, C, D and E) have clear differences among them regarding potential risk and returns. These differences are limited by the current regulations, including the requirement of a minimum return.
The main difference among the different fund types, as stipulated in the regulation, is the proportion invested in variable income securities. Fund Type A has the highest concentration allowed in variable income securities with a maximum of 80%; fund Type B has a maximum concentration of 60%; fund Type C has a maximum concentration of 40%; fund Type D has a maximum concentration of 20% and fund Type E (begun in October 2008) has the lowest concentration with a maximum of 5%.
The regulation establishes several restrictions regarding the investment activities that can be developed by each fund to guarantee the maintenance of such differences among the funds according to the risk of variable income securities permitted for each of them.
The investment philosophy behind the five fund types is to combine the highest possible diversification with low costs and a high degree of transparency. These principles must always be observed when making and implementing investment decisions.
The Pension Reform Law increased the range allowed for AFPs to make investments abroad, from a range between 30% to 45% to a range between 30% to 60% during the first twelve months following the enactment of the Pension Reform Law (from October 1, 2008 to September 30, 2009); and between 30% to 80% after the thirteenth month (October 1, 2009). In September 2008, the Central Bank gradually increased the maximum investments limits abroad: 45% after October 1, 2008, 50% after December 1, 2008, 55% after April 1, 2009 and 60% after August 3, 2009. In November 2010,
the Central Bank again increased the maximum global investment limit abroad from 60% to 80%, gradually increasing as follows: 65% after December 1, 2010, 70% after March 1, 2011, 75% after June 1, 2011 and 80% after September 1, 2011.
The table below summarizes the Pension Reform Law’s ranges for foreign investments per each Type of Fund:
Investment ranges in foreign investments per each Type
The Pension Law also distinguishes among the age and gender of the individuals who may elect to participate in the different fund Types. A description of the requirements to participate in each of the funds is detailed as follows:
According to the Pension Law, if at the ages of 56 and 51, respectively, men and women who have their mandatory contribution and/or their indemnity account in fund Type A do not make any choice regarding the destination of their mandatory pension funds, such funds are gradually transferred to fund Type B.
Moreover, if the participant does not voluntarily choose a fund, the mandatory contributions are assigned and modified by law according to the participant’s age:
-
Contributions made by men and women younger than 35 are to fund Type B;
-
Contributions made by men between 36 and 55 and women between 36 and 50 to fund Type C; and
-
Contributions made by men older than 56 and women older than 51 to fund Type D.
For participants with programmed withdrawal, temporary income with deferred life annuities or immediate life annuities with a programmed withdrawal plan, 100% of their savings are initially allocated to fund Type D. Thereafter, these participants may opt for any fund among the permitted alternatives.
After the creation of multiple funds, fund Type C managed by Provida continues to have the highest proportion of assets (42.9% at the end of 2013) while fund Types A, B and D managed by the Company have reached significant sizes from the voluntary changes and substantive transfers recorded after September 2002.
Assets under management of Provida
December 2002
December 2013
MCh$
% of the total
MCh$
% of the total
Fund Type A
112,692
1.1
%
3,367,104
14.1
%
Fund Type B
1,177,690
11.7
%
3,829,508
16.1
%
Fund Type C
7,346,323
73.2
%
10,208,629
42.9
%
Fund Type D
1,016,124
10.1
%
4,334,986
18.2
%
Fund Type E
395,863
3.9
%
2,081,156
8.7
%
Total
10,048,691
100.0
%
23,821,383
100.0
%
Source: Superintendency of Pensions
Under the Pension Law, each pension fund is a separate legal entity from the AFP, not affected in any way by the AFP’s financial situation. In the event of the AFP’s bankruptcy, the Superintendency of Pensions would assume control of the fund, allowing participants 90 days to transfer funds in their individual capitalization accounts to another AFP. At the end of this period, the fund custodian appointed by the Superintendency of Pensions would transfer all remaining accounts to another fund designated by the custodian.
The Pension Law establishes that each AFP must maintain a reserve for mandatory investments equal to 1% of the value of each pension fund under management. The mandatory investment is calculated in accordance with instructions issued by the Superintendency of Pensions, and corresponds to the value of each pension fund two days prior to calculation. Since June 1995, the Pension Law has required AFPs to invest this mandatory investment in shares of the respective pension fund managed by the AFP. This legislation is intended to eliminate potential conflicts of interest that could arise between investment decisions relating to a portfolio held as the AFP’s reserves and those relating to the portfolio where pension funds are invested.
The mandatory investment’s purpose is to provide a guarantee in the event that the performance of a specific pension fund drops below the required minimum level of return. This requirement has been determined in
accordance with the different portfolio compositions, requiring those with a greater investment in variable income securities and therefore potentially subject to higher volatility (funds Type A and B), a larger margin to achieve the requirement. As a consequence, for pension funds Type C, D and E, this level is the lesser of (a) the weighted average annual return for the last 36 months of the same type of all pension funds in the system less 2% and (b) 50% of the weighted average annual return for the last 36 months of the same type of all pension funds in the system. The minimum return for pension funds Type A and B is the lesser of (a) the weighted average annual return for the last 36 months of the same type of all pension funds in the system less 4% and (b) 50% of the weighted average annual return for the last 36 months of the same type of all pension funds in the system.
The Pension Reform Law includes an exception to the previous paragraph for those funds that have less than 36 months of operation. In these cases, such AFP will be liable to the fund to the extent that the weighted annual return of funds Types A and B are less than the lesser of (a) the weighted average annual return of all funds of the same type for the period equivalent to the operating months of the new fund, less 6%, and (b) 50% of the weighted average return of all funds of the same type for the period equivalent to the operating months of the new fund type. In the case of pension funds Type C, D and E, the weighted average real return may not be less than the lesser of (a) the weighted average return of all funds of the same type for the period equivalent to the operating months of the new fund, less 4 %, and (b) 50% of the weighted average return of all fund types of the same type for the period equivalent to the operating
months of the new fund type. The latter will not be applicable to the administrators with respect to any of their pension funds that have less than twelve operating months. The five funds currently managed by Provida have more than 36 months of operation.
The average annual return is calculated by the Superintendency of Pensions according to a weighted formula established by the Pension Law which, among other provisions, limits the maximum participation of any AFP in the calculation. If for a certain month, the pension fund’s annual return on investment falls below the minimum return required, the difference must be covered by the mandatory investments. If the resources from mandatory investments are applied and the minimum return is still not reached, the Chilean Government will have to make up the difference.
In the event that the pension funds managed by an AFP fail to fulfill the required minimum level of investment return, the AFP is required to cover the difference within five days of such determination by the Superintendency of Pensions. If reserves are used to fund any deficit in the required level of return, the AFP must replenish them within fifteen days. If a deficit is not covered or if reserves are not replenished, the AFP will be liquidated by the Superintendency of Pensions.
As of and for all periods presented, the Company has complied with the minimum reserve and minimum return requirements.
Services of granting life and disability benefits
The Pension Reform Law eliminated the individual responsibility of AFPs in connection with life and disability insurance, by establishing that the AFPs altogether should purchase a fixed and single insurance premium through a bidding process to cover this obligation. Such insurance is awarded to one or more insurance companies, providing the best economic offer (See “Item 3—Key Information — Recent regulatory changes”).
Additionally, through the Pension Reform Law, a solidarity pension system financed by the resources of the State, which began granting benefits on July 1, 2008, was created to complement the existing private pension system. The solidarity pension system grants, among other benefits, basic solidarity pensions for disability and solidarity pension. To have these benefits, certain requirements must be met:
-
Basic solidarity pension for disability: being declared disabled by a Medical Commission designated by the Superintendency of Pensions; not being eligible to receive any pension under any pension regime; being between 18 and 65 years of age; being part of a family group belonging to the 60% of the poorest population in Chile and demonstrating residence in Chile for a period of not less than five years in the last six years prior to the submission of the request.
-
Solidarity pension contribution for disability: being declared disabled by a Medical Commission designated by the Superintendency of Pensions; being affiliated with the Pension System established by the 3,500 Law Decree of 1980; not receiving a pension from any other pension regime; being between 18 and 65 years of age; being
part of a family group belonging to the 60% of the poorest population in Chile; demonstrating residence in Chile for a period of not less than five years in the last six years prior to the submission of the request and being eligible for a disability pension, provided that the sum of the amount of such pension plus any other pension received from such system is less than the basic solidarity pension of disability.
The solidarity system is administered by the Social Pension Institute, which has the right to grant, terminate, suspend or modify benefits, when applicable. Additionally, it regulates requests for processing the operations and benefit payments of the solidarity system, adding the necessary regulations for its application and operation. However, current participants in the private pension system are able to submit requests regarding the solidarity pension system via the AFP (such as Provida) to which they belong, which in turn submits the request to the Social Pension Institute.
Services of granting senior pension benefits
As required by the Pension Law, each AFP must provide specific senior pension benefits to their participants who meet the legal age requirement: 60 years of age for women and 65 years of age for men.
Participants meeting certain requirements can obtain senior pensions before the legal age. Such requirements were modified in 2004, in which over a term of 6 years the required percentages between the calculation of the anticipated pension over the average taxable remuneration of the last ten years and over the minimum legal pension gradually increased. The latter is intended to increase the level of pensions received and to restrain the trend of retirement before reaching the legal age, motivated by the possibility of receiving a permanent salary in case of unemployment or having two incomes (remuneration and pension).
The period (from/until) and the required percentages are described in the following table:
The Chilean Government guarantees a minimum level of senior pensions for all AFP participants who have contributed for at least 20 years (including any year contributed under the former system) having reached the retirement age stipulated by the law. In the event that the participant’s contributions into his/her individual capitalization account together with the amount paid pursuant to any recognition bond do not meet these minimum levels, the AFP pays the pension from the participant’s individual capitalization account until the account is depleted.
The solidarity pension system, financed by Chilean State resources and incorporated through the Pension Reform Law, also grants benefits for the solidarity basic senior pensions and for the solidarity senior pension contributions. To obtain these benefits the participants must meet certain requirements:
Being at least 65 years of age at the moment of the claim.
-
Not being eligible for any pension under any pension regime either as a titular or as a beneficiary of a life disability.
-
Demonstrating 20 years (continuous or discontinuous) of residence in Chile, accounted from the time the participant had reached 20 years of age and for a period of not less than four years of residence in the last five years prior to the submission of the request in order to obtain the benefits.
-
Being part of a family group belonging to the poorest population in Chile in accordance with the coverage schedule mentioned below.
As of July 1, 2013 the amount of the benefit is Ch$82,058 per month. This benefit will be automatically adjusted by 100% of the variation of inflation from the last 12 months since the last adjustment. When inflation exceeds 10% since the last adjustment, the adjustment will be made immediately, regardless of whether 12 months have passed or not.
Solidarity senior pension contribution
-
Being at least 65 years of age at the moment of the claim.
-
Receiving a pension inferior to the maximum pension with solidarity contribution (PMAS).
-
Not being a contributor in the Chilean police officers’ social security system (“Dipreca” in its Spanish acronym) or the Chilean armed forces social security system (“Capredena” in its Spanish acronym), or receiving pension under such regimes as a titular or beneficiary of a life pension.
-
Demonstrating 20 years (continuous or discontinuous) of residence in Chile, calculated from the time the participant had reached 20 years of age and for a period of not less than four years of residence in the last five years prior to the submission of the request in order to obtain the benefits.
-
Being part of a family group belonging to the poorest population in Chile in accordance with the coverage schedule mentioned below.
Gradual Coverage of the benefits for Basic Pension and Solidarity senior pension contribution
At retirement, the participant chooses among four options for receiving his/her pension benefits: an immediate life annuity, a temporary income with deferred life annuity, a programmed withdrawal plan or an immediate life annuity with a programmed withdrawal plan.
-
Immediate life annuity: the participant selects a life insurance company, which pays the participant a monthly fixed income for the rest of his/her life in exchange for transferring the total amount in his/her individual capitalization account. Currently, for the participants that elect this alternative, the insurance company must offer a pension that is equal to or greater than the minimum seniority pension guaranteed by the State. From July 1, 2008, due to the Pension Reform Law, the life annuity must be equal to or higher than the basic solidarity senior pension applicable at the moment of retirement.
Temporary income with deferred life annuities: the participant contracts with a life insurance company to start receiving life annuity plan benefits on a specific date in the future, immediately transferring the associated funds of such life annuity to the insurer. Likewise, the surplus to the temporary pension that covers the period from the moment when the participant selects his/her option until the annuity payments begin, is maintained in the individual capitalization account with the AFP.
-
A programmed withdrawal plan: the participant keeps his/her funds deposited in his/her individual capitalization account with the AFP and receives a monthly pension in accordance with a pre-established formula that considers the historical pension fund return and the rates offered by the insurance companies, as well as the participant’s life expectancy. The amount of the participant’s monthly pension under the programmed withdrawal plan is recalculated every twelve months based on the surplus amount in the individual capitalization account of the participant and the variables described above. In the event that such amount falls below the minimum pension level, the Government’s guarantee becomes enforceable, if applicable. If the participant chooses a programmed withdrawal plan, it is possible to switch him/her to a life annuity plan. However, if a participant elects to transfer savings from his/her individual capitalization account
to a life insurance company to receive life annuity benefits, the participant may no longer return to the programmed withdrawal plan.
-
Immediate life annuity with a programmed withdrawal plan: the participant contracts an immediate life annuity with a life insurance company financed with part of the balance maintained in his/her individual capitalization account, allocating the remaining balance to the programmed withdrawal plan. In this case, the pension would correspond to the sum of the amounts received from each modality. The participants allowed to opt for this modality should be able to obtain an immediate life annuity equal to or higher than the minimum seniority pension guaranteed by the State (with the Pension Reform Law, the life annuity must be equal to or higher than the basic solidarity senior pension).
All pension obligations that an AFP must pay through programmed withdrawals from the individual capitalization account are expressed in shares of pension funds and translated to UF. The obligation are recalculated annually according to a formula established by law that considers the new balance of the account, by considering the pension funds returns and the interest rate of annuities. Insurance annuity amounts are expressed in UF and are thus indexed to reflect the impact of inflation. The AFP has no financial obligations once the annuity is purchased. In the case of the bankruptcy of companies providing insurance annuities, the Chilean Government guarantees 100% of this obligation up to the legal minimum pension amount per month and 75% of the pensions over the minimum pension up to UF 45 (approximately US$2,000).
Additionally, a participant who has been affiliated with the pension system for at least 10 years may withdraw part of the balance of his/her individual capitalization account and freely use the surplus provided that he/she is able to obtain a pension from his/her pension funds equal to or superior to 70% of his/her average taxable remuneration and equal to or superior to 150% of the legal minimum prevailing pension. Such surplus corresponds to the difference between the total pension savings in the participant’s capitalization account and the funds required to finance the highest value resulting from the application of the aforementioned requirements (70% of average taxable remuneration and 150% of the legal minimum pension). To calculate the requirement, the lowest rate between the average rate of the life annuities informed and the rate of programmed withdrawal of the fund where the participant has his/her account, is used.
With the Pension Reform Law, the right to withdraw the disposable surplus is now limited to those participants that have a pension superior or equal to 100% of the maximum pension with a solidarity contribution, and 70% of the average of remunerations received and salaries declared.
Primary revenues
(i) Fee income
The most significant source of revenues from operations for Provida is the monthly fee charged to participants in connection with deposits into his/her individual capitalization account. Under the Pension Law, an AFP is permitted to charge a fee for:
-
Collection and administration of mandatory contributions;
-
Pension payments of programmed withdrawals and temporary income;
Collection and administration of voluntary savings;
-
Management and transfer of voluntary pension savings to other entities, and
-
Transfer of contributions made by voluntary participants.
Provida currently charges fees for each of the above services (as do the other AFPs, except for AFP Habitat and AFP Modelo, which do not charge fees for transferring contributions of voluntary participants).
In accordance with the Pension Law, each AFP is allowed to set the fees it charges to its participants or pensioners. In connection with fees charged, the Pension Law establishes that each AFP must apply the same fee levels to each of its participants.
Although there is no legal limit on the fees that an AFP may charge, competitive pressures have limited the range of fees charged by AFPs.
The AFP earns fees in connection with the collection of contributions to participants’ individual capitalization accounts and the administration of such accounts. In 2013, out of the total of Provida’s revenues from operations, MCh$162,220 or 86.9% corresponded to fee income received for the service of administering accounts and ancillary services. Almost all of the fee income comes from charges levied on participants’ monthly mandatory contributions to their individual capitalization accounts.
Collection and administration of mandatory contributions
Fee structure is one of the competitive variables of the AFP industry. With the implementation of the Pension Reform Law, the ability that each AFP has to determine whether or not to charge a fixed fee deducted from the pension fund has been eliminated. Consequently, each AFP may charge only a variable fee, which is a percentage of the salary used to calculate the mandatory pension contribution or a combination of both types of fees. Variable fees are charged as a percentage of a participant’s monthly taxable salary that is subject to a mandatory contribution of 10% of the salary base. In accordance with the Pension Reform Law, the maximum amount of taxable income should be adjusted in January of each year as per the variation of the real wage index, as measured by the Chilean Instituto Nacional de Estadísticas (National Statistics Institute). In January 2013, this maximum amount increased from UF 67.4 (MCh$1.57) to UF 70.3
(MCh$1.64) per month, and in January 2014 the amount was further adjusted to UF 72.3 (MCh$1.69).
For instance, if a participant receives a monthly salary of Ch$200,000 as a dependent worker, he/she must contribute Ch$20,000 to an AFP. Under Provida’s variable fee currently in force (1.54% of taxable remuneration), the total monthly fee collected in relation to that account would be a variable fee of Ch$3,080.
The requirement to charge a uniform fee to all participants has limited the AFPs’ flexibility to reward long-term or higher-income contributors with lower fees compared to those charged to newer and/or lower funds accounts. Although changes to this rule have been proposed on several occasions, Provida cannot ensure that a change will be adopted that would allow Provida to reward long-term or higher-income contributors through lower fees.
The fee structure for the years 2013, 2012 and 2011 is as follows:
Monthly fees for mandatory contributions
2013
2012
2011
Provida
1.54%
1.54%
1.54%
Industry High
2.36%
2.36%
2.36%
Industry Low
0.77%
0.77%
1.14%
Industry Average
1.48%
1.48%
1.55%
Source: Superintendency of Pensions
Pension payments of programmed withdrawals or temporary income
With respect to fees charged for programmed withdrawals or temporary income, the Pension Reform Law authorizes the AFPs to charge only a variable fee over the pension paid. Currently, four AFPs charge a variable fee of 1.25%, while AFP Habitat charges a fee of 0.95% and AFP Modelo charges a fee of 1.20%.
Under this structure, the participant maintains his/her funds deposited in an individual capitalization account in the AFP and withdraws a monthly pension in accordance with a pre-established formula determined by law. In the event that such amounts fall below the minimum pension level, the Government’s guarantee applies, depending on the contribution level of participants. See “Item 4. Information on Provida—B. Business overview—Principal activities—Services of granting senior pension benefits.”
Collection and administration of voluntary savings
The Pension Reform Law required a fee charge for the administration of voluntary savings accounts calculated as a percentage of the balance kept on such accounts. Currently, Provida charges a fee of 0.92%, while the rest of the AFPs’ fee charges are in the range of 0.60% to 0.95% per year.
Administration and transfer of voluntary pension savings
The AFPs, like other authorized institutions, also offer participants the option to have a voluntary pension savings account, in which they can make monthly deposits previously determined to improve their future pensions. AFPs are allowed by law to charge a fee on assets under management, and fees currently range between 0.50% and 0.70% on an annual basis, and the fee charged by Provida is 0.56%. Fixed fees on fund transfers collected for other institutions can also be charged, currently ranging between Ch$1,100 and Ch$1,437 for each fund transfer (approximately US$2.10 and US$2.74). The current fee charged by Provida is Ch$1,250 (approximately US$2.38).
With the Pension Reform Law, the AFPs have the right to charge a fee for administering the collective voluntary pension savings and on the transfer of these savings deposits towards other administrators or authorized institutions. Fees for administration may be freely agreed between the employer and the AFP or the authorized institutions, allowing for different fees to be charged for different contracts. Additionally, different fees could be charged in relation to the same contract according to the number of workers incorporated in the plan.
Under no circumstance will an AFP be able to establish conditions related to the affiliation or transfer of participants who are parties to a collective voluntary pension savings contract.
Transfer of contributions made by voluntary participants
The AFPs have the right to charge a fixed fee for transferring contributions made by voluntary participants collected by the AFP, but whose destination is another AFP or authorized institution. Provida currently charges a fee of Ch$1,250 (approximately US$2.38) per operation, while the rest of the AFPs charge a fee between Ch$1,100 and Ch$1,144 (approximately US$2.10 and US$2.18). Two out of six AFPs in the industry, AFP Habitat y AFP Modelo, do not charge a fee for such service.
The fees can be changed at any time upon three months’ notice to participants, the Superintendency of Pensions and the public. The following table sets forth the fee rates charged by Provida for each of the services in the last three years:
The AFPs charge fees on active accounts into which contributions are made. Accordingly, the number of contributors, as well as their average salaries, and not the number of participants, determines the monthly mandatory fee income of each AFP. In 2013, Provida had the largest average market share of contributors among all AFPs (33.4%).
(ii) Gains (losses) on mandatory investments
Gains (losses) on mandatory investment (see “Item 4. Information on Provida—B. Business overview—Principal activities—Investment services for participants’ contributions in pension funds”) represented 8.0%, 8.1% and -2.3% of Provida’s revenues from operations in 2013, 2012 and 2011, respectively. As detailed in the following tables, such returns have evolved in accordance with the performance of each of the pension funds, as well as the relative importance of each fund relative to the total assets under management.
2013
2012
2011
Gains (losses) on mandatory investment (in MCh$)
14,991
14,515
(3,469)
Weighted average real returns of pension funds
4.9%
4.7%
-5.2%
Mandatory investments of pension funds (in MCh$)
234,929
217,072
201,418
% Mandatory investment’s participation in portfolio
1.0%
1.0%
1.0%
Gains (losses) on mandatory investments and real average returns for each fund
2013
2012
2011
Gains (losses)
Returns
Gains (losses)
Returns
Gains (losses)
Returns
MCh$
%
MCh$
%
MCh$
%
Fund Type A
2,564
6.4%
2,588
6.0%
(3,106)
-11.6%
Fund Type B
2,152
3.9%
2,617
5.0%
(1,700)
-8.0%
Fund Type C
6,181
4.4%
6,405
4.6%
(378)
-4.2%
Fund Type D
2,892
5.3%
2,231
3.9%
1,187
0.0%
Fund Type E
1,202
5.0%
674
3.2%
528
4.2%
Total
14,991
4.8%
14,515
4.7%
(3,469)
-5.2%
Source: Superintendency of Pensions.
Mandatory investment maintained in each fund and percentage of each fund in the total
2013
2012
2011
Mandatory
Investment
Participation
Mandatory
Investment
Participation
Mandatory
Investment
Participation
MCh$
%
MCh$
%
MCh$
%
Fund Type A
33,313
14.2%
31,324
14.4%
32,178
16.0%
Fund Type B
37,948
16.1%
36,773
17.0%
35,629
17.7%
Fund Type C
100,737
42.9%
95,326
43.9%
89,593
44.5%
Fund Type D
42,694
18.2%
37,772
17.4%
33,762
16.7%
Fund Type E
20,237
8.6%
15,877
7.3%
10,256
5.1%
Total
234,929
100.0%
217,072
100.0%
201,418
100%
Source: Superintendency of Pensions.
Moreover, the concentration of total administered assets in those funds considered the most conservative (funds Types D and E) has continued to increase, while concentration in those funds considered the most risky (funds
Types A and B) has declined. Such performance likely reflects the volatility exhibited over certain years (i.e. 2008 and 2011) in the financial markets, when negative returns were recorded, causing certain participants to prefer to take less risks, by moving themselves towards more conservative funds.
(iii) Other revenues
Other revenues are mainly revenue from fees charged by the subsidiary AFP Génesis in Ecuador, for services rendered by Administradora de Fondos de Cesantía and fees recovered from other AFPs, which were MCh$9,209 or 4.9% of Provida’s revenues from operations in 2013. In addition, other revenues include the financial revenues of life and disability insurance of MCh$333 in 2013, representing 0.2% of Provida’s revenues from operations arising from the excess of cash flows of the insurer in relation to premium payments made by the Company.
Primary expenses
(i) Employee Expenses
Employee expenses were MCh$43,728, equivalent to 45.9% of the total of Provida’s expenses from operations as of December 31, 2013. Wages and salaries of administrative personnel totaled MCh$21,790, equivalent to 49.8% of total employee expenses, while the administrative staff of 1,070 workers (annual average) represented 58% of the Company’s total staff during the year. Wages and salaries of sales personnel amounted to MCh$14,959, equivalent to 34.2% of the total of employee expenses, while the sales staff of 760 workers (annual average) represented 42% of the Company’s total workers. Short-term benefits to employees were MCh$3,545 equivalent to 8.1% of total employee expenses, and indemnities for cessation
of labor relationship amounted to MCh$3,434 equivalent to 7.9% of total employee expenses.
(ii) Miscellaneous other operating expenses
Miscellaneous other operating expenses were MCh$35,746 in 2013, representing a 37.5% out of Provida’s total operating expenses. This item is composed of: administrative expenses (real estate, telecommunications and services) equivalent to 71.0% of total miscellaneous other operating expenses, data processing expenses (maintenance, repair and liaison services) equivalent to 11.2% of total miscellaneous other operating expenses, other operating expenses (disability qualification costs and Board of Directors’ remunerations) representing 9.7% of total miscellaneous other operating expenses and marketing expenses (publicity and communications to clients) representing 8.1% of miscellaneous other operating expenses.
(iii) Depreciation and Amortization expenses
Total depreciation and amortization expenses were MCh$13,601 in 2013, equivalent to 14.3% of total expenses from operations. The amortization expenses totaled MCh$11,361 and depreciation expenses were MCh$2,240 in 2013.
(iv) Life and disability insurance premium expense
The Chilean Pension Law previously required AFPs to individually purchase insurance to cover their obligation to provide life and disability benefits to their participants (see “Item 10. Additional information—C. Material contracts” and “Item 19. Exhibits—4.1 Life and disability insurance contract”). Beginning in July 2009 with the implementation of the Pension Reform Law, the requirement to provide life and disability insurance was awarded to a group of insurers through a bidding process, having the same value for all the participants regardless of the AFP to which they contribute.
In the year 2009, the recurring expense for such concept was only recorded until the month of July, when the temporary premium of the contract with coverage between January 2005 and June 2009 and the provisions for higher casualty rate were recorded. In 2010, this item only included expenses related to the recovery of leftovers from previous coverage periods stemming from the last insurance contract, and provisions for unfavorable casualty rate due to changes in the value of payable casualties. In 2011, a gain was recorded as a result of reversals on provisions for unfavorable casualty rates stemming from the difference between the amount required as of December 2010 by using the best available information, and the estimation made by Provida’s
model as of December 2011. These lower provisions arise from lower expected discount rates at the moment of paying the
casualties. A gain was also recorded in 2012 stemming from the higher rate of payments of casualty claims than the expected (implying a lower sensitivity regarding interest discount rates) accompanied by a decrease in the average cost per casualty. In 2013, an expense was recorded due to our decision to create a reserve in order to reflect the best estimation for such obligation.
Likewise, insurance regulations governing life and disability insurance policies instructed that casualties reserves should be determined at a market interest rate instead of historical rates (defined as the minimum of the previous semester) to contracts with coverage commencing in July 2009, giving the alternative to insurers to voluntarily apply such methodology to existing contracts. Provida requested that BBVA Seguros de Vida, adopted this new regulation for the January 2005-June 2009 contract so that the Company’s liability would more accurately reflect the amount that
would be effectively paid (i.e. fair value). Moreover, by mutual consent of the parties (previous compensation to the insurer for change in conditions) the financial performance of cash flows surplus was modified with a benchmark determined by assets of similar duration rather than the liability of the insurance.
Because Provida’s insurance contract for coverage prior to July 2009, Provida only maintains those casualties pending payment due to temporary disability period. The liability amount determined by the insurance company is recorded at the market interest rate and Provida applies its casualty model by determining the liability amount at forward rates at the moment of casualty payments.
In accordance with the Authority’s request, Provida recognized the higher amount between the calculated liability amount (from the insurance company) and the amount determined by its casualty model, thus the expense to be recognized depended on interest rate fluctuations.
Although Provida does not have individual contracts with prevailing coverage, as a result of the regulatory requirements for temporary disability which state that payments of disability claims can be made effectively three years after first ruling disability is confirmed by a final ruling of a medical commission, there is one contract described that is still in run-off where its final settlement is under process.
The life and disability insurance premium was an expense of MCh$2,095 for the year ended on December 31, 2013, a gain of MCh$3,718 as of December 2012 and a gain of MCh$2,326 as of December 31, 2011. See “Item 5. Operating and financial review and prospects—A. Operating results— Operating results for the years ended December 31, 2013 and 2012”.
Payments of benefits for the participant or his/her beneficiaries
Before the Pension Reform Law became effective, if a participant died or became disabled before the legal age of retirement (65 years of age for men and 60 years of age for women) and had not accumulated sufficient funds in his/her individual capitalization account to provide the participant or his/her beneficiaries the benefits required by the Pension Law, the AFP had an obligation to make up for the shortfall to the participant’s account. Additionally, all AFPs were required to obtain individually an insurance policy with a licensed life insurer to provide coverage for this obligation. With the Pension Reform Law, women’s age became the same as men’s age (65 years old) to apply for these benefits and the individual requirement for the AFPs was eliminated beginning in July 2009 and AFPs are no longer liable for any shortfalls. See “Item 4. Information on Provida—B. Business overview—Principal activities—Services of granting
life and disability benefits”.
Participants are eligible for the life and disability benefits provided that they are salaried workers who were contributing to an AFP at the time of the disability or death or they have made at least one contribution in the last year and that contribution was preceded by at least six monthly contributions in the last twelve months. Likewise, self-employed and voluntary participants are eligible for these benefits if they have made contributions in the month prior to the disability or death.
The Pension Reform Law established that self-employed workers would be gradually incorporated by requiring them to make mandatory contributions (See “Item 4. Information on Provida—B. Business overview—Principal activities—Services of collection and management of contributions made by participants”). Given the above, life and disability insurance coverage for self-employed workers that have made mandatory contributions will be subject to an annual taxable income equal to or superior to seven minimum monthly incomes, permitting them to have an annual coverage commencing on May 1 of the year in which contributions were made until April 30 of the
following year. In those cases where the taxable income is inferior to the aforementioned requirement, the coverage will be proportionate to participants’ contributions.
Disability benefits are given to those participants who have been qualified as disabled by a Medical Commission designated by the Superintendency of Pensions. A participant is qualified as disabled if his/her working capacity is diminished by at least 50%, as follows:
-
Participants with a partial disability, defined as experiencing a loss of between one-half and two-thirds of their working capacity, are entitled to receive a pension equal to 50% of their prior income, which is defined as their monthly average taxable income for the last ten years, or for the latest period during which they worked, as adjusted for inflation. The entitlement to partial disability benefits has a temporary character and covers a three-year period beginning after the first disability determination. At the end of such period, the Medical Commission makes a second disability determination (final determination) and concludes whether the temporary disability continues, changes to a total disability status, or whether the participant is no longer disabled.
-
Participants with total disability, defined as experiencing a loss of more than two-thirds of their working capacity, are entitled to receive a pension equal to 70% of their prior income. Under the Pension Reform Law effective from October 1, 2008, the partial disability status for total disability was eliminated, therefore, when the Medical Commission qualifies a participant as totally disabled, this determination will be considered definitive and unique.
Life benefits are granted to the legal beneficiaries of participants who have died before reaching the legal age of retirement. Benefits are established as a percentage of the participant’s prior income. The applicable percentage depends primarily on the family status of his/her beneficiaries: for a spouse with no children, the percentage is 42.0%; for a spouse with children, 35.0%, plus 10.5% for each child up to 18 years of age (until the age of 24 for students and until death for disabled children).
Before the implementation of the Pension Reform Law, if the disabled or deceased participant’s individual capitalization account did not have the amount of funds necessary to pay the pension stipulated by law, the insurers (under its contract with the AFPs) had to make up the shortfall in case of death or total disability. In the case of disability after the determination of partial disability (or total disability until October 2008), the AFP had to record a provision in order to settle the shortfall three years from when the final disability determination was made, taking into account the three years of temporary pension payments that would be received by the participant following the initial disability determination.
In order to determine the costs of the aforementioned benefits, the insurer made these calculations at the time of the initial disability determination, three years before the shortfall was paid and if it was required by the final disability determination, on the basis of the information available to it at that time, including current annuity rates and the amount of funds in the participant’s individual capitalization account. If a final disability determination was made, the insurer updated the amount of initial disability reserve based on the information available at such time.
As previously mentioned, with the implementation of the Pension Reform Law, the insurers receive a single premium for providing life and disability benefits, therefore the insurers are ultimately responsible for the associated payments.
Payments by Provida to the insurer
Before modifications introduced by the Pension Reform Law and under the insurance policy in force until June 2009, Provida paid the insurer a temporary rate, equal to 1.00% of the aggregate taxable remuneration of all of Provida’s contributors, which was intended to provide the insurer a portion of the funds it would be required to pay to beneficiaries for life and disability benefits, which amounted to a monthly average (between June 2008 and June 2009) of MCh$6,150 for temporary premium. Also, Provida paid the insurer until June 2009 a monthly fixed management fee, which averaged (between June 2008 and June 2009) MCh$45 per month, a figure that is not considered as premium paid to the insurer for casualties of its participants.
Commencing in July 2009, the payments to the insurer regarding the life and disability insurance premium arising from processing residual and unprocessed contributions, corresponded to contributions made before July 2009. Such annual expense was MCh$370 in 2011, MCh$329 in 2012 and MCh$155 in 2013.
In the first quarter of each year until the close of each contract (48 months after the termination, extendable for two years upon mutual consent), Provida and the insurer compare the funds paid by the Company for the prior fiscal year under the temporary rate and true-up to the sum of (i) the funds effectively accumulated and paid by the insurer to participants or their beneficiaries and (ii) the estimated requirement by the insurer necessary to pay disabled participants once final disability determinations of disabled status have been made by the Medical Commission referred to above (the sum of (i) and (ii) is referred to herein as the total cost of casualties). If the casualty costs are greater than temporary payments, Provida must pay the insurer
the difference, up to a maximum amount based on the maximum casualty rate (where the casualty rate is equal to the cost of casualties divided by the aggregate taxable remunerations of all of Provida’s contributors) established in the insurance contract. For 2009, that rate was 1.70%. Provida has no obligation to pay the insurer for a casualty rate exceeding the maximum rate. Monthly premiums were paid during the entire contract’s term at a temporary premium of 1.00%. Provida’s participation in the surplus is 100% if the casualty rate is equal or lower than 1.70%. If the casualty rate is lower than the temporary rate, the insurer would reimburse the difference to the Company. For the fiscal year 2010, the
provisions made by Provida regarding payments to the insurer (in March 2010) resulting from comparing the temporary rate and the accounted casualty costs, as well as additional provisions attributable to the application of the Company’s casualty model were MCh$1,689. For the fiscal year 2011, a gain in provisions for unfavorable casualty rates of MCh$2,696 was recorded due to the adjustments made when determining the difference between the amounts required as of December 2010 by using the best available information, and the estimation made by Provida’s model as of December 2011. These lower provisions arise from lower expected discount rates at the moment of paying the casualties. For the fiscal year 2012, a gain in provisions for MCh$4,047 was recorded due to the higher rate of payments of casualty claims than expected (implying a lower sensitivity regarding interest discount rates)
accompanied by a decrease in the average cost per casualty. For the fiscal year 2013, an expense for MCh$1,940 in provisions was recorded, primarily due to the creation of a reserve based on payments made by deceased participants, which might embody survival claims.
The last life and disability insurance contract with coverage from January 1, 2005 to June 30, 2009 was entered into with BBVA Seguros de Vida S.A. Under such contract, the maximum casualty rate expressed as a percentage of the contributors’ taxable remunerations initially amounted to 1.27%, with a monthly premium paid for the contract coverage period calculated at a provisional rate of 0.70%. The Company’s participation in the surplus will be 100% if the casualty rate is equal
to or lower than the maximum rate of the contract, as calculated over the contributors’ taxable remunerations. Additionally, the contract established monthly payments to the insurance company calculated at a provisional rate of 0.70% applied to the total of remuneration and monthly taxable income of the contributors, plus a monthly fixed premium of UF 2,150 (MCh$50) during the coverage period of the contract. As a result of updating the mortality tables effective beginning in the year 2008 and the resulting impact in the higher costs in the insurance, upon mutual assent of the parties, in view of the changes in the economic conditions of the contract,
the terms of the insurance contract were modified. Beginning in January 2008, the maximum casualty rate was 1.70% expressed as a percentage of the contributing contributors’ taxable remuneration, while the temporary rate was 1.00%, retaining the monthly fixed premium of UF 2,150 (MCh$50).
The insurance contract also contemplates yearly true-ups payable to the insurance company, for the difference between payments made by Provida (temporary premium and previous true-ups) and the total accounted cost of casualties (paid or accrued by the insurer) at each year end, which have taken place on March 31 of each year from 2006 onwards. Also, on that date monthly financial revenues will be paid, based on the value recorded at December 31 of the previous year, calculated by applying the rate of return established in the contract over the surplus of cash flow maintained by the insurer (total payments made by Provida minus casualties paid by the insurer).
The General Rule N°243 from the Superintendency of Securities and Insurance, ruling insurance companies, effective beginning on July 1, 2009, instructed that casualty reserves should be determined on a monthly basis at the market interest rate instead of the historical rate, giving the alternative to apply this methodology to insurance contracts previous to the implementation date of the rule. Provida requested that BBVA Seguros de Vida adopt such a rule. Consequently and given the impact of this over the administration of the insurance contract and the associated risks, by common agreement the parties modified the conditions. Therefore, the rendering of life and disability
insurance implies a mismatch risk between the assets and liabilities duration arising from such obligation.
The final settlement of this contract can occur 48 months after the expiration date of the coverage period as of June 30, 2009, i.e., June 2013. However, the Company and BBVA Seguros de Vida S.A. are still analyzing the definite balance of such insurance policy. The previous insurance policy was in force from August 1, 2003 to December 31, 2004 and was entered into with BBVA Seguros de Vida S.A. The maximum casualty rate was 1.10%, expressed as a percentage of the contributing contributors’ taxable remunerations. Provida’s participation in the surplus was
100% if the casualty rate was equal to or lower than 1.10% and greater than 0.85% of the contributors’ taxable remunerations, and 90% if the casualty rate was equal to or less than 0.85%. Additionally, the contract contemplated monthly payments calculated at a provisional rate of 0.70% applied to the total of remunerations and monthly taxable remunerations of the contributors and a monthly fixed premium of UF 2,150 for the contract coverage period. In March 2005, Provida began to make yearly true-up payments to the insurance company. The final settlement date of this contract was contemplated to occur on December
31, 2008, but it was extended by common agreement of the parties, and finally settled in April 2011.
The following table sets forth the cost of casualties, the payments to the insurance company and the provisions for unfavorable casualty rates of each insurance contract as of December 31, 2013:
Costs for claims reported by the Insurance Company
Payments made to the Insurance Company (MCh$)
Provision at the date of the information provided by the Insurance Company
Gross Provision at the current year-end (not including financial revenues effects) (*)
Date
MCh$
To reported date
At 12-31-2013
MCh$
BBVA Seguros de Vida S.A. (**)
08-2003 to 12-2004
04/30/2011
92,368
92,199
92,199
-
-
BBVA Seguros de Vida S.A. (***)
01-2005 to 06-2009
12/31/2013
378,589
378,845
378,845
-
(3,667)
Total
-
(3,667)
(*)
Since Provida and BBVA Seguros de Vida S.A. are currently reviewing the final settlement of the insurance, a higher provision than the provision estimated by the insurance company has been determined taking into account the death fees payment claims incurred but not reported related to survival benefit claims to be provided where a deceased participant had a spouse and/or beneficiaries entitled to receive the survival benefits in accordance with current regulations.
(**)
The insurance contract subscribed with BBVA Seguros de Vida S.A. for the August 2003 to December 2004 coverage period ended in April 2011. The casualty rate of such policy exceeded the maximum rate of 1.10%. Consequently the excess of costs for MCh$157 was assumed by the insurer.
(***)
Includes accrued premiums for a total amount of MCh$491 can be discounted from the balance payable to BBVA Seguros de Vida according to the respective contracts, but as the accrued premiums net balance was in favor of AFP Provida, provisions for casualties are not required.
Principal markets
As of December 31, 2013 there were 6 AFPs operating in Chile. The last incorporation was AFP Modelo, which in August 2010 started to render services to the new participants’ portfolio entering into the pension system, awarded in the first bidding process carried out in February 2010. Additionally, there is another AFP, AFP Regional, which has been legally incorporated but has not yet begun operations.
As previously mentioned Provida is the largest and one of the oldest AFPs operating in Chile and has occupied a leading position in the private pension industry since its establishment.
Provida’s leading position is shown in the following table regarding market shares for the most relevant variables as of December 31, 2013:
In accordance with the Pension Law, no company in Chile other than an AFP may provide pension benefits of a similar nature, with the only exception that the management of voluntary pension savings and collective voluntary pension savings has been opened to other authorized institutions.
The implementation of multiple funds and the consequent increase in the number of pension fund portfolios caused participants to require higher levels of information in order to make optimal decisions regarding their risk and age profiles, and thus the pension advisory services granted by AFPs became of special relevance, becoming a new competitive aspect of the market.
From the implementation of multiple funds in September 2002 through the end of the year 2007, the returns reached by each of the five funds recorded outstanding levels, with highest returns in those funds with a greater concentration of variable income investments, such as funds Type A and B. However, during 2008 as a result of the financial crisis, affecting worldwide stock markets, the returns dropped significantly to the point of showing negative levels, adversely impacting primarily the high-risk funds and consequently decreasing their total accumulated returns. Subsequently, during the years 2009 and 2010 when stability in the markets was recovered, the trend returned to positive returns levels, where fund Types A and B obtained the highest returns. In the year 2011, stock markets recorded losses again, leading the most risky funds to obtain negative rates of return during the period, basically
due to negative returns experienced by local and foreign stock markets. However, in 2012 once again the stock markets recorded higher returns in the most risky funds. In 2013, although fund Type A recorded the highest return during the year, the most conservative funds (fund Types D and E) generated strong returns.
The following table sets forth information with reference to returns, over a 12-month period (as of year end 2013, year end 2012 and year end 2011); the annual average since the multiple funds’ inception (as of year end 2013, year end 2012 and year end 2011) and the relative positions of each of the pension funds managed:
Return over the last 12 months
Fund type
Jan13 –
Dec13
Provida’s position
Jan12 –
Dec12
Provida’s position
Jan11 –
Dec11
Provida’s position
Fund Type A
6.35%
6
6.01%
4
-11.59%
5
Fund Type B
3.87%
6
4.96%
2
-8.00%
6
Fund Type C
4.37%
5
4.61%
5
-4.16%
5
Fund Type D
5.26%
5
3.89%
4
0.02%
4
Fund Type E
5.03%
4
3.19%
3
4.19%
3
Source: Superintendency of Pensions
Annual average return from the beginning of the multiple fund system
Fund type
Sep02 – Dec13
Provida’s position(*)
Sep02 – Dec12
Provida’s position(*)
Sep02 – Dec11
Provida’s position(*)
Fund Type A
6.73%
2
6.77%
2
6.85%
2
Fund Type B
5.33%
5
5.48%
5
5.53%
5
Fund Type C
4.78%
5
4.81%
5
4.84%
5
Fund Type D
4.40%
4
4.32%
4
4.37%
4
Fund Type E
3.56%
4
3.42%
4
3.45%
4
Source: Superintendency of Pensions
(*) Ranking only includes 5 AFPs since AFP Modelo did not exist in 2002.
In terms of voluntary pension savings, as of December 31, 2013, Provida recorded the second highest number of voluntary pension savings (APV in its Spanish acronym) for accounts in the AFP industry, with a total of 233,482 active accounts, representing a market share of 26%. On the same date, funds accumulated by such APV accounts were MCh$308,431, a market share of 14%.
Additionally, the law permits other financial institutions such as banks, insurance companies and investment companies to manage this kind of savings. While competitors have the advantage of offering a wider variety of products considering that AFP investment levels are limited by law, the AFPs have lower costs than other market participants and charge lower fees.
As of September 2013, according to information from the Superintendency of Pensions, the AFPs continue to play an important role in the voluntary pension savings market with market shares of 64% in the number of accounts and 55% in administered funds, followed by mutual funds with a market share of 14% in terms of number of accounts and by insurance companies with a market share of 18% in terms of assets under management.
Provida’s activities, as with all AFPs in the industry, are limited to offering only those products and services permitted under the Pension Law. As a result, Provida seeks to maximize its income by attracting and retaining participants as well as by offering the possibility to make voluntary pension contributions and to receive payments under the programmed withdrawals structure.
Provida attracts participants mainly through its sales force, which targets potential clients who may be interested in changing the administration of their pension savings.
Although the scope of potential clients was restricted by the bidding process of new participants that enter the private pension system for the first time, as established by the Pension Reform Law, the same Law gradually incorporated the contribution obligation of self-employed workers, widening the pension market. See “Item 4. Information on Provida—B. Business overview—Principal activities—Services of collection and management of contributions made by participants”.
The sales force also performs tasks aimed at retaining participants’ portfolios in order to avoid client transfers to other AFPs. Provida also captures new participants through its wide network of pension service centers without the intervention of sales agents.
As the largest AFP in the Chilean private pension system, Provida seeks to capitalize on its brand name recognition to attract new clients and retain existing ones. Management believes that Provida’s prestige is boosted by its consolidated leading market position.
During 2013, under its strategy of supporting and advising its affiliates during their pension life, Provida carried out various marketing and advertising campaigns designed to help retain Provida’s customer portfolio, featuring clear and simple messages relating to investment and funds issues. Additionally, the AFP informed its pension participants on events occurring in the country, such as the tax reform law, and how to consider market variables, personal preferences and savings terms in choosing the correct fund type for them.
Furthering its role in pension education, AFP Provida partnered with the Business School of Adolfo Ibañez University to sponsor a college-level diploma in social security, aimed at human resources officials from different entities in social security matters.
In the third quarter of 2013, due to the change in Provida’s ultimate parent, activities were focused on a rebranding campaign to fit Provida’s corporate image with that of its controlling shareholder, MetLife, Inc., at all customer contact points: branch offices, website, social networks and call centers.
Provida’s established network, the largest in the Chilean pension system, assisted 1.6 million participants last year. In order to ensure that the assistance can be perceived as excellent and that each contact is likely to become a pension advisory and business opportunity, the management model in offices project was consolidated during 2013, seeking to improve the customer’s experience, and translate it into a differentiating factor. For this, the Mystery Shopper, a tool part of that model, has allowed assessing the current level of customers’ satisfaction coming to Provida’s branch offices, and has identified the differences between the actual performance and the standards to be complied with.
During the year, AFP Provida mainly oriented its efforts to understand the current and future needs of its customers, by reinforcing the assistance protocols in order to further improve the expectations of those clients who received assistance in Provida’s branch offices. As a result, the model showed significant and sustained improvements of 65% in the satisfaction indicator.
Additionally, the Company enhanced the 106 self-assistance-device system available in the network throughout the country, by facilitating its use and enhancing its performance. With these enhancements, more than 3.5 million of certificates were issued in the year, enabling participants to obtain pension data in a quick and secure manner.
As for telephone service, during 2013 more than 803,000 pension calls were answered, of which 338,000 were assisted directly by an executive. We improved our telephone service in 2013 which let us achieve an effective 95% service assistance level.
Moreover, on both our classic and mobile sites, functions for pensioners were reinforced and the transfer form was renewed in order to facilitate its use. In order to assist participants in a greater mix of channels, social network tools have been used intensively to establish a dialogue with customers that helps the Company resolve their doubts and get feedback on prevailing participant needs. With this approach, Provida has become one of the most important players in these channels in the AFP system, with a total of 53,733 fans on Facebook and 4,246 followers on Twitter. The joint work of these digital channels during 2013 resulted in more than 5 million visits to the Provida website.
Finally, at the end of 2013, the employers assistance model was modified to prioritize remote assistance in order to cover a larger number of employers with pension deficits. This assistance service helps employers with many issues, among them issues relating to possible judicial collections, the correct payroll administration and the timely inclusion of the entities’ staff, by intervening in certain situations related to pension payments at a general level; thus the employer can resolve issues without needing to come to the Company’s branch.
Among our major projects are:
-
Third stage of the optimization of in-office services, including the migration to the “front” (branch office) of processes addressing unresolved survival issues with or without a recognition bond. This action attempts to further improve the Company’s effectiveness, efficiency, flexibility and agility in operations related to pension formalities. As a complement, and in order to strengthen controls over the various processes associated with the payment of pension benefits that have external funding, the new Capital Collection unit has been created, which seeks to carry out operational and accounting control of the funds received from external parties for the payment of pensions.
-
Restructurings in the self-service terminals and in the virtual branch office for employers, designed to expand available service functions and reduce response time. In order to improve efficiency of communications with Provida’s participants, a function to update participants’ contact information has been implemented. This will help the company distribute information by mail or e-mail, monitor procedures carried out by participants and optimize advisory and marketing offer tasks executed by sales agents.
-
The extension of the office management model implemented last year which sought to organize each branch network’s duties to emphasize business management, benefitting management and quality of service areas-to the sales force in order to generate a sustained demarcation based on knowledge and experience in pension, financial and tax matters. As with the office model, quality indicators were incorporated that will be matched with incentives and recognition programs.
-
Recruitment of a new sales force with clear incentives toward capturing and retaining customers and obtaining larger contributions to voluntary savings products. This was strengthened by a market and incentive research plan aimed at improving the knowledge and productivity of management. Thus, at the end of 2013, the number of sales agents had increased by 23.4% as compared to the end of 2012.
As of December 31, 2013, AFP Provida had the largest commercial network at the national level among all AFPs, with 58 branch offices distributed throughout the country, including 10 branches located in the northern region (17% of total branch offices), 15 branches located in the central-northern region (26% of total branch offices), 10 branches located in the Metropolitan region (17% of total branch offices), 13 branches located in the southern-center region (23% of total branch offices) and 10 branches located in the southern region (17% of total branch offices).
Sales Force
Provida has focused its efforts to maintain a more specialized and highly productive sales force.
(*) According to the information released by the Superintendency of Pensions, AFP Modelo does not report a sales force.
Provida has not focused its marketing efforts on any specific industry or region. Each sales agent is assigned to cover certain enterprises within a geographic coverage area. Sales personnel have visiting programs tailored to different companies to promote Provida and encourage employees to transfer to Provida from other AFPs. During these regularly scheduled visits, salespersons emphasize Provida’s size, historic performance, leading market position and reputation for high quality of customer service in order to attract participants, reinforcing the concepts of experience, capability and trust.
Regarding new participants in the system, it is important to note that the Pension Reform Law established that the bidding of the new participants’ portfolio and the awarding the subscription to new accounts for a two-year period, should be awarded to the AFP offering the lowest fee among the current fees, which fee must be applied to its entire portfolio and not only to the awarded portion. The latter has implied that the AFPs are not able to grow by capturing new workers that enter the labor market for the first time. Therefore, the main future growth sources for Provida will be focused on capturing participants with voluntary pension savings, and the reincorporation of inactive participants as active contributors, especially self-employed workers.
Provida’s total selling and marketing expenses amounted to MCh$18,425 in the fiscal year 2013, MCh$12,183 in the fiscal year 2012 and MCh$10,992 in the fiscal year 2011. The ratio of commercial expenses (corresponding to sales remunerations plus marketing expenses) to fee income was 11.4%, 7.9% and 7.8% for the fiscal years 2013, 2012 and 2011, respectively. Provida has followed a policy to make its commercial expense more efficient; however, this expense increased by 10.8% in 2012 and by 51.2% in 2013. These increases were attributable to the implementation of a strategic plan, which aims to strengthen the Company’s leading position and address new market growth opportunities, through a specialized sales force trained to capture customers with higher taxable income that let them to have the capacity for potential voluntary savings. The higher
expense recorded in 2013 was attributable to the consolidation of the distribution model that resulted in a greater staff and increased expenses associated with the integration process with the new controlling parent.
The nature of the significant activities carried out by Provida relates primarily to activities related to its unique line of business and pension fund administration. Given the above, such activities are not significantly affected by seasonal factors.
Licenses
The software license contract entered into with BBVA Inversiones Chile corresponded to intellectual property rights related to the use, training in and functionality of, software implemented on different operating and administrative processes. This represented a total of MCh$0 for Provida in 2013, MCh$2,832 in 2012 and MCh$2,832 in 2011. This contract ended in December 2013.
All AFPs are subject to extensive and continuous regulatory reviews. The principal authorities regulating AFPs in Chile are the Superintendency of Pensions, the Central Bank, the Superintendency of Securities and Insurance, the Rating Commission and the Pension Advisors Council. AFPs are primarily subject to the Pension Law and to the Corporation Law, and have the Superintendency of Pensions as their main regulator.
The Superintendency of Pensions
General. The Pension Reform Law created the Superintendency of Pensions, which is considered to all effects as the successor of the Superintendency of AFPs. The Superintendency of Pensions, an independent governmental agency under the supervision of the Ministry of Labor and Social Security, is in charge of supervising and controlling AFPs. The Superintendency of Pensions authorizes the creation of new AFPs and mergers of existing ones and has broad powers to interpret and enforce legal and regulatory requirements. Furthermore, in cases of non-compliance, it has the ability to impose sanctions, such as admonitions and fines and in extreme cases it may order the liquidation of an AFP. In addition, any amendment of an AFP’s by-laws, such as an increase in capital, is subject to the Superintendency
of Pensions’ approval. New functions and powers of the Superintendency of Pensions include the authority to monitor and supervise the solidarity pension system administered by the Social Pension Institute and establish and administer the Pension Advisors Registry.
The Superintendency of Pensions’ officers frequently inspect the AFPs’ branch offices and examine their activities and records. AFPs are required to submit their quarterly financial statements to the Superintendency and periodically provide detailed information on their operations. The audited financial statements for each fiscal year must be filed with the Superintendency of Pensions within 60 days after the end of the fiscal year covered by the report.
The Central Bank
The Central Bank is an independent legal entity created under the Chilean Constitution. It is subject to the Central Bank Act and, to the extent applicable and not inconsistent, also to the laws and regulations applicable to the private sector. It is governed and administered by a Council composed of five members appointed by the President of the Republic and requiring a “special majority” vote of the Chilean Senate to be elected.
The Central Bank is responsible for, among other things, monetary policy and exchange controls in Chile. The appropriate registration of a foreign investment in Chile grants the investor access to the formal exchange market. Foreign investments can be registered with the Foreign Investment Committee under Decree Law N° 600 or can be registered with the Central Bank under the Central Bank Act. Additionally, the Central Bank is responsible for establishing the maximum investment limits permitted for pension funds by type of securities and by type of issuer within certain defined ranges. However, it cannot establish minimum investment limits.
The Superintendency of Securities and Insurance (the “SVS”)
The SVS is an independent governmental agency that supervises, regulates and controls the Chilean capital markets. As a public corporation listed on the Chilean stock exchange, Provida is subject to the supervision, regulation and control of the SVS.
The Rating Commission
The Rating Commission is composed of one representative of the Superintendency of Pensions, one representative of the Superintendency of Banks and Financial Institutions and one representative of the Superintendency of Securities and Insurance. All of the representatives are designated by their respective Superintendents and by four representatives of the AFP industry. The Rating Commission’s main objective is to determine whether securities qualify as acceptable for pension fund investment.
With the Pension Reform Law, the approval of securities on foreign investments is made by the Investment Regime, a new legal body incorporated by the regulation for pension fund investments.
The Pension Advisors Council is composed of one person appointed by the President of the Republic of Chile with certain requirements; one executive designated by the Central Bank of Chile; one executive designated by the AFPs and two executives designated by the Deans of the economics and business administration faculties of accredited universities.
The main functions of this Council relate to the issuance of pronouncements regarding matters covered by the Investments Regime and proposals to regulate investments of pension funds, especially in connection with investment limit structures, mechanisms for measuring the risk of investment portfolios and operations with derivative instruments made by pension funds. Additionally, it will advise the Superintendency of Pensions in terms of investments of pension funds.
The Investment Regime was created through a resolution passed by the Superintendency of Pensions and subscribed by the Treasury, having previously consulted the Pension Advisory Council, and it includes certain regulations that regulate investments made by the Administrators with the resources of pension funds and defines investment limits intended to have an adequate diversification of funds to achieve appropriate returns and safety for such resources.
Since October 2013, AFP Provida has been a MetLife Company. Through its subsidiaries and affiliates, MetLife Inc. has grown to become a leading global provider of insurance, annuities and employee benefit programs. Through its subsidiaries and affiliates, MetLife has operations in nearly 50 countries and holds leading market positions in the United States, Japan, Latin America, Asia, Europe, and the Middle East. In Chile, MetLife manages assets of MUS$45,481 (MCh$23,821,383) through Provida in a competitive market in which Provida has sustained a leading position over time.
The following chart currently sets out the related companies comprising Provida’s corporate structure:
MetLife Chile Acquisition Co. S.A. holds 91.38%, directly and indirectly, of the shares of Provida. In detail, MetLife Chile Acquisition Co. S.A. holds directly 17.79% and indirectly 21.97% (through ADSs); and 51.62% through Inversiones Previsionales S.A.
International
In May 1995, Provida amended its by-laws to allow for the creation of a subsidiary, Provida Internacional, whose objective is to invest in companies in countries other than Chile with the purpose of granting social security benefits in those countries.
Currently, the only non-Chilean subsidiary held by Provida is AFP Génesis in Ecuador.
-
Ecuador-AFP Génesis. The initial investment in AFP Génesis was made in 1995 and Provida Internacional held a 25.00% equity interest until September 2001, when it acquired the remaining 75.00% of the shares held by Filanbanco, becoming the sole shareholder with 100% of the shares. During 2013, this subsidiary generated profits of MCh$1,880, an 18.1% (MCh$416) decrease as compared to 2012 primarily due to lower fee income recorded in the period, mainly attributable to the elimination of charges for accounts maintainenance services and balance sheets issuances, as per the new regulation prevailing in the financial Ecuadorian market which resulted in lower fees collected. In addition, the period recorded higher
operating expenses resulting from administrative and sales staff compensation and higher administrative expenses. In 2012, this subsidiary generated profits of MCh$2,296, a 26.4% (MCh$824) decrease from 2011. This result was attributable to lower fee income and the lower exchange rate as compared to the rate recorded in 2011 (7.7%), but such result was partially offset by the decreased expense in remunerations of both administrative and sales personnel. AFP Génesis’s functional currency is the U.S. dollar.
The main market indicators regarding AFP Génesis held through its wholly owned subsidiary Provida Internacional S.A., are as follows:
As of December 31,
Year
Number of Participants
Market share
Ranking
Assets under Management (MUS$)
Market Share
Ranking
2013
260,077
97%
1
67
91%
1
2012
256,974
81%
1
67
66%
1
2011
240,086
69%
1
67
67%
1
Source: Guayaquil Stock Exchange in Ecuador.
As mentioned in "Item 4. Information on Provida — A. History and development ", both AFORE Bancomer in Mexico and AFP Horizonte in Peru were sold in the first quarter of 2013.
Also, the higher accrued benefit of the investment in AFORE Bancomer in Mexico and AFP Horizonte in Peru includes profits of these associates only until November 2012. As a result of the analysis of selling the pension business in Latin America initiated by the BBVA Group in May 2012, Provida Internacional began to consider sales alternatives, and therefore classified these investments as assets held for sale on its balance sheet at the end of November 2012, in accordance with IFRS. The results from these affiliates thus are no longer recognized.
-
Peru-AFP Horizonte. Provida Internacional held until February 27, 2013 a 15.87% equity interest in AFP Horizonte in Peru, where it had been present since 1993. In 2012, Provida’s share of profits from AFP Horizonte was MCh$3,404, increasing by MCh$1,220 (55.9%) with respect to 2011 due to higher gains from mandatory investments and increased fee income.
-
Mexico-AFORE Bancomer. In November 2000, Provida Internacional purchased a 7.50% equity interest in AFORE Bancomer in Mexico and continued to hold such interest until January 9, 2013. In 2012, Provida’s share of profits in this equity investee was MCh$4,263, an increase of MCh$460 (12.1%) with respect to 2011, as a result of higher fee income and increased gains from mandatory investments. The following table describes the total of Provida’s share of profits in its equity investees, both foreign and local, for the last three fiscal years:
Since 1981, Provida’s strategy has included the development of a nationwide network of branches and also has enhanced its infrastructure and technology through the years in order to improve its assistance model. In the first stage, the pension advisory services and quick-service processing of transactions were incorporated through self-service devices in branch offices, and collection and payment services were outsourced in order to focus on the customer assistance network. Since 2010, the Optimization of Services in Branch Offices project was implemented, in order to consolidate the service quality when processing benefits. Provida maintained 57 branch offices as of December 31, 2013. The Company plans to open 24 new branch offices in order to reinforce the
Company’s competitive value by increasing the support and advisory services during our client’s life cycle.
As of December 31, 2013, Provida maintained 33 owned offices of which 30 were exclusively used as branch offices, one was rented, one remained unoccupied and the remaining one was used as an administrative office.
The principal property that Provida owns is the Pedro de Valdivia Tower, an 18-story headquarters building comprising 13,014.18 square meters, located in the east commercial neighborhood of Santiago that houses all Provida staff units. Since 2003, Provida has rented spaces to staff departments of BBVA Chile S.A., such rental
arrangement will be finalized by the end of 2014 as agreed to between MetLife and BBVA Group. The Company’s Operations Area is located in downtown Santiago.
The U.S. Securities and Exchange Commission (“SEC”), requires all companies to include a discussion of critical accounting policies or methods used in the preparation of the financial statements. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, which would potentially result in materially different results under different assumptions and conditions. We believe that our critical accounting policies involved in the preparation of our financial statements in accordance with the International Financial Reporting Standards (IFRS) are limited to those described below. For a summary of significant accounting policies and methods used in the preparation of the financial statements, see Note 4 to the audited Consolidated Financial Statements.
Accounting of life and disability insurance costs
According to the Pension Law, until June 30, 2009, Provida obtained insurance to cover its obligation to provide life and disability benefits to its participants to the extent that the participants did not have sufficient funds in their individual capitalization accounts to finance the pensions. See “Item 4. Information on Provida—B. Business overview—Primary expenses”.
The Pension Reform Law eliminated the individual responsibility of AFPs to provide life and disability insurance benefits, stipulating a bidding process of all AFPs for obtaining life and disability insurance contracts. The first bidding process was awarded on July 1, 2009, to a group of 5 insurance companies for a 12-month term, with a premium of 1.87%. On July 1, 2010 for a 24-month term, the second bidding was awarded to a group of 7 insurance companies with a premium of 1.49%. On July 1, 2012, the third bidding process, for a 24-month term, was awarded to a group of 4 insurers with a premium of 1.26%.
As a consequence, Provida only maintains a contract for coverage prior to July 2009, and is currently analyzing the definite balance prior to its close. Provida’s obligations under the contract for payment of casualties due to the temporary disability period (three years) depend on definite disability status being finally confirmed. Therefore, the Company’s results are affected by the cost of the insurance stemming from an insurance contract with expired coverage, depending on the relevant variables at the moment of casualty payments.
For the contract previously mentioned, the Superintendency of Pensions requires AFPs to provision a minimum of 100% of the contracts’ balances, provided by the insurers in their consolidated financial statements. Nevertheless, Provida, through its experience, has concluded that, in certain discount rate scenarios, the insurers’ calculations regarding the required amounts to provision in respect of future disability payments differ from the actual amounts that the insurers will be required to pay.
Even though the rules of the Superintendency of Pensions do not require AFPs to make additional provisions over those of the insurer, if the AFPs have enough evidence supporting a higher cost of the insurance, they shall establish provisions corresponding to such higher cost.
Provida has developed its casualty model to more accurately accrue the amounts that are required to be paid to disabled participants once their final determination is made. The basic premise is to use Provida’s best estimate, at the time of the initial determination, of the payment that will be required upon final determination. The variables
associated with the model are: disability status, rate of return of pension funds over the three years of the temporarily disabled period and the interest rate prevailing at the moment of payment (expected rate). This approach contrasts with that taken by insurance companies, which only use information relating to the disabled status of persons at the time of the initial determination, such as, three years before payments are made, and which updates the discount rates on monthly basis in accordance with the discount rate prevailing in the market in order to value the reserves.
The provisions determined under the casualty model represent the Company’s best estimate of the required future payments for life and disability benefits.
The sensitivity analysis below represents the potential changes in fair value, cash flows and earnings based on parameters that in the management’s opinion are the most relevant to determine the insurance obligation, incorporating the factors listed in the table.
2013
Most Likely Aggregate
Negative Variable Scenario
Base Scenario (***)
Most Likely Aggregate
Positive Variable Scenario
Discount Rate
2.61%
2.73%
2.91%
Rate of return on ICAs(*)
0.00%
0.00%
0.00%
Total Liability (MCh$) (**)
5,024
3,667
1,631
(*) ICAs: Individual Capitalization Accounts.
(**) The liability is presented net of financial revenues generated by the insurance contract still in force.
(***) The base case is based on the casualty rate estimated by the casualty model, which is higher than the amounts in the insurers’ balance sheet and, therefore, the amounts estimated by the model were used as a basis to estimate provisions for the year ended December 31, 2013.
The following is a description of the key information used by Provida in its casualty model and how such information compares with the information used by insurance companies:
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Discount rates: In order to calculate the amount of the required provisions necessary to cover the premiums paid on life and disability insurance, the law requires that the provision be discounted by the market rate for annuities. Commencing in July 2009 as a result of a policy framework originated by the joint insurance bidding process, the insurers could adopt the regulation to value reserves at the prevailing interest market instead of historical interest rate (minimum of the previous semester when constituting the provision) as if it were a life annuity.
Likewise, Provida estimates the forward rates at the moment of payment by estimating a maximum period until May 2016, since most disability casualties under a temporary disability determination will be paid within such period. Given the high volatility of interest rates, the relevance of such interest rates when determining the liability value and the short term in which such liability will be paid has been determined in accordance with the variability of the rates in a term of approximately 6 years. The maximum and minimal amounts that this variable could be at a 99% confidence level.
In order to establish the most likely positive and negative scenarios the average minimum, maximum and medium rates were calculated by a simulation methodology which is based on a Monte Carlo model.
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Returns on participants’ individual capitalization accounts: Participants have a positive balance on their individual capitalization accounts, and this balance is subject to the pension funds returns over the three years following the establishment of the initial reserve for disability until the final disability determination is made. The insurer’s calculations do not take into account that the participant’s individual capitalization account will grow over such three-year period and, for sensitivity purposes, Provida has used the same criteria in this period of evaluation due to the high volatility experienced by pension fund returns.
Other factors are included as variables in the casualty model which, however, do not significantly impact the calculation of the premium such as the death of disabled participants in light of a certain percentage of participants that receive an initial disability entitlement determination and die prior to the final determination of their disability. Because survivor beneficiary benefits are lower than disability payments, this percentage can significantly influence the amount of disability payments that are ultimately required to be made. The insurer assumes that no disabled participants will die prior to the final determination of their disability.
In the case of incurred but not reported claims, Provida does not make any provisions, since the coverage period for disability finished and the deceased participants under coverage reported represent a minimum percentage of casualties.
Therefore, during the term of an insurance contract, the Company calculates and establishes provisions for the expected cost to the insurer. In fact, through the application of the casualty model previously described, the provisions made by Provida with respect to future premium payments to be made to the insurer tend to reflect in a more accurate way the effective payments that it will have to make so that there is a higher correlation between revenues and expenses for a specific period. The information in the casualty model is reviewed monthly, making any modification considered appropriate at that moment.
In light of the termination of the insurance policy with BBVA Seguros de Vida S.A. which is currently under process of settlement, AFP Provida has deemed it necessary to establish an additional provision, beyond that recognized in the insurer´s balance sheet. This additional provision was calculated based on the death fees payment claims potentially payable as survival benefit claims to deceased participants whose spouse and/or beneficiaries are legally entitled to receive as survival benefits.
Mandatory investments
The principal financial investments of Provida are mandatory investments which aim to guarantee the minimum return required by law equal to 1% of investment in shares of each pension fund under administration. The mandatory investment requirement is calculated according to instructions issued by the Superintendency of Pensions. Mandatory investments represented approximately 60% and 50% of total consolidated assets as of December 31, 2013 and 2012, respectively. As established in Decree Law 3500, the mandatory investment’s purpose is to provide an actual minimum rate of return over the investment portfolios for each of the pension funds. This minimum rate of return is based on the weighted average rate of return of all pension funds of the AFP system, over a 36-month period. This requirement has been determined in accordance
with the different portfolio compositions, requiring a larger margin for those with a greater investment in variable income securities and therefore potentially subject to higher volatility (Funds Type A and B). If for a certain month the rate of return of a pension fund was lower than the minimum rate of return requirement, the AFP is required to cover the difference within five days of such determination by the Superintendency of Pensions. If mandatory investments are used to fund any deficit in the required level of return, the AFP must replenish them within 15 days. If a deficit is not covered or if mandatory investments are not replenished, the AFP will be liquidated by the Superintendency of Pensions.
Although gains and losses on mandatory investments have certain risks to the stability of the Company’s results in view of the evolution of the returns obtained by different portfolio compositions in the pension funds, the greatest risk associated with mandatory investments is non-compliance with the minimum rate of return requirement. Provida’s risk management policies for mandatory investment are described in Note 4 to Provida’s audited Consolidated Financial Statements.
Provida’s management has designated mandatory investments as financial assets at fair value through profit and loss as those financial assets are managed and its performance is evaluated on a fair-value basis in accordance with the Company’s documented investment management policy, and information about the mandatory investments is provided internally on that basis.
Impairment of Long-Lived Assets
Goodwill
For the purpose of impairment testing, goodwill is allocated to a cash-generating unit that is expected to benefit from the synergies of the combination. A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognized directly in profit or loss in the consolidated statement of comprehensive income. An impairment loss recognized for goodwill is not reversed in subsequent periods.
On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
Impairment of Tangible and Intangible Assets other than Goodwill
At the end of each reporting period, Provida reviews the carrying amount of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. Intangible assets with indefinite useful lives are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired.
If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, Provida estimates the recoverable amount of the cash-generating unit to which the asset belongs.
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss, unless the relevant asset is carried at revalued amount, in which case the impairment loss is treated as a revaluation decrease.
When an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.
Recent Accounting Pronouncements
Please see “Item 18. Financial Statements” and Note 3 to Provida’s audited Consolidated Financial Statements for additional information regarding recent accounting pronouncements.
Introduction to Provida’s results from operations
The following discussion should be read in conjunction with Provida’s audited Consolidated Financial Statements, and the Notes thereto, included elsewhere in this annual report. See “Item 18. Financial Statements.”
Provida is the largest AFP in Chile, providing management of pension funds and various related services. These services are limited to those permitted for AFPs under the Pension Law and revenues are largely dependent on the level of fees charged to participants. As a consequence, Provida’s results from operations are dependent on the general level of economic activity in Chile and, in particular, on the number of workers who affiliate with Provida and make monthly contributions, as well as the amount of their taxable salaries subject to contributions. Given that during recent years the Chilean economy has grown, Provida estimates that number of workers in Chile and their aggregate salaries will maintain its growing trend in the future, although not necessarily at the same rate as in the past. Because of its important market share, the broad geographic coverage of its branch network, and the diversity of its participants, Provida
believes that its revenues are not dependent on any particular sector of economic activity.
The principal source of revenues from operations for Provida (See “Item 4. Information on Provida—B. Business overview—Primary revenues”) is the fees charged to contributors in connection with deposits of their monthly mandatory contributions. Therefore, the revenues from operations of Provida can be materially impacted by any combination of significant changes in fee rates, the number of contributors or taxable salaries. From December 1999 until April 2006, Provida charged a variable fee of 2.25% over each contributor’s salary and a nominal fixed fee of Ch$390 per month discounted from the contributor’s accounts. From May 2006 onwards, the variable fee increased to 2.39% and the fixed fee was eliminated. In January 2008, the variable fee increased to 2.59%, and subsequently
in October 2008, it increased again to 2.64%, basically due to the increase in the insurance coverage to participants. In July 2009, the variable fee decreased to 1.54% due to the Pension Reform Law’s elimination of AFPs’ individual obligation to provide life and disability insurance (See “Item 3. Key Information –— Recent regulatory changes”) and has remained the same during the years 2012 and 2013.
For voluntary pension savings, Provida established a nominal fixed fee of Ch$1,250 for each transfer of funds from other institutions and a yearly fee of 0.56% over administered funds. In relation to voluntary accounts, in October 2008 Provida started to charge a variable fee of 0.92% for administered balances and eliminated the fixed fee for withdrawals. Additionally, the Company charges a variable fee of 1.25% over the pensions for programmed withdrawals. With respect to pensions for programmed withdrawals or temporary incomes, the Company charges a variable fee of 1.25% over the pensions. Additionally, the Company charges a fixed fee of Ch$1,250 for transferring contributions
of voluntary participants to other institutions (See “Item 4. Information on Provida—B. Business overview—Primary revenues”).
Generally, another significant source of revenues has been the gains on mandatory investments. Gains generated from mandatory investments belong to the AFP but do not necessarily result in increased cash flow because as the pension funds grow, so do the reserve requirements imposed on mandatory investments.
The most significant components of Provida’s expenses from operations (See “Item 4. Information on Provida—B. Business overview—Primary expenses”) are employee expenses for both administrative and sales staff, and miscellaneous other operating expenses that include marketing expenses, data processing expenses, administration costs, disability qualification costs and the Board of Directors’ remunerations. Until 2009 the cost of life and disability insurance premiums was the most important expense in the total expenses from operations (46%). Such expense was a recurring cost until July 2009, when the Pension Reform Law eliminated AFPs’ individual responsibility to provide benefits related to the life and disability insurance.
Other income (revenues) of Provida are: share of the profit (loss) from equity accounted associates, financial costs, income from investments, gain/loss from exchange differences, other non-operating income and other non-operating expenses.
The following table sets forth the composition of Provida’s revenues from operations and expenses for the periods indicated:
Provida recorded a profit after taxes of MCh$140,086 for the year ended December 31, 2013, an increase of 34.7% over the profit after taxes of MCh$104,034 recorded for the year ended December 31, 2012.
The following is a year-to-year comparison of major income statement line item for the years ended December 31, 2013 and 2012.
Revenues from operations
In fiscal year 2013, total revenues from operations were MCh$186,753, an increase of MCh$8,520 or 4.8% as compared to the prior fiscal year. This increase was mainly caused by higher revenues of MCh$8,045. A discussion of variations within each class of revenues from operations for the fiscal year 2013 as compared to the fiscal year 2012 is described below:
In fiscal year 2013, revenues were MCh$171,762, an increase of MCh$8,045 or 4.9% with respect to the fiscal year 2012, which is explained as follows:
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Fee income was MCh$162,220 in fiscal year 2013, an increase of MCh$8,806 (5.7%) as compared to 2012. This result was the outcome of increased mandatory contributions due to growth in salary base, basically reflecting the increase in the taxable income of contributors. It is important to mention that in fiscal year 2012 additional fee revenues were received from the Social Pension Institute due to certain residual and unprocessed contributions from previous periods. If this effect were ignored, the mandatory fee income would have grown by 6.6%.
As a result of the growing trend of its fee income previously mentioned, Provida has maintained its leading position in the pension industry with an average market share of 36% in terms of number of participants, 33% in terms of contributors and 27% in terms of salary base in the fiscal year 2013. Concerning assets under management, Provida’s market share was 28% as of December 31, 2013. In figures, the average number of contributors was 1,777,446 and the monthly average salary base was MUS$1,613, while assets under management were MUS$45,482 for the year ending December 31, 2013.
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Other revenues were MCh$9,542 in fiscal year 2013, lower by MCh$761 (7.4%) with respect to fiscal year 2012. This result was mainly due a decrease financial revenues of MCh$620 (65.1%) stemming from the runoff of the life and disability insurance contract that resulted in lower cash flows managed by the insurer and lower returns recorded in the period. Additionally, a decreased of MCh$141 (1.5%) was recorded primarily attributable to lower operating revenues from AFP Genesis due to the elimination of maintenance charges in accounts and to lower revenues from services rendered to Administradora de Fondos de Cesantía.
Gains (losses) from mandatory investments were MCh$14,991 in fiscal year 2013, an increase of MCh$475 or 3.3% with respect to the result recorded in fiscal year 2012. Even though the weighted average nominal return of pension funds was lower (+7.04% in 2013 as compared to +7.27% in 2012), the increase was sustained by higher contributions collected in the period.
The performance was a result of growth in foreign variable income in developed countries in 2013 that more than offset the fall experienced by emerging economies during the period. In addition, local fixed income positively contributed, as a result of the drop observed in nominal and real interest rates that involved higher prices in local
fixed income. Such results were partially offset by a reduction of 14.0% in local variable income as measured through IPSA (Selective Price Index Shares).
The main contributions came from Fund Type C (41% of the gains) with a nominal return of +6.51% and Fund Type D (19% of the gains) with a nominal return of +7.42%.
Expenses from operations
Total expenses from operations were MCh$95,236 in fiscal year 2013, an increase of MCh$25,872 or 37.3% as compared to the prior fiscal year. This increase was caused by increases of MCh$11,572in personnel expenses, MCh$5,813 in life and disability insurance premium expenses, MCh$4,925 in depreciation and amortization costs, and MCh$3,812 in miscellaneous other operating expenses and by a MCh$250 decrease in impairment losses. An explanation of variations for each class of expenses from operations for fiscal year 2013 as compared to fiscal year 2012 is provided below.
Life and disability insurance premium expense recorded an expense of MCh$2,095 in fiscal year 2013, a negative variance of MCh$5,813 as compared to the gain recorded in fiscal year 2012. Since in 2013, the Company established an additional provision, taking into account the death fees payment claims potentially payable as survival benefit claims to deceased participants, whose spouse and/or beneficiaries are legally entitled to receive such survival benefits.
Employee expenses amounted to MCh$43,728 in fiscal year 2013, an increase of MCh$11,572 or 36.0% with respect to 2012. Such result is detailed as follows:
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Total wages and salaries to administrative personnel were MCh$21,790 in fiscal year 2013, an increase of MCh$3,410 or 18.5% as compared to fiscal year 2012. This result was primarily attributable to a larger staff maintained during the year, resulting in higher fixed compensation and benefits paid expenses. The increase in staff was due to incorporating as permanent employees some external employees who had previously provided services via BBVA Servicios Corporativos (since September 2012). The internalization of certain previously outsourced tasks during 2013 to provide better service to participants also resulted in staff increases.
In fiscal year 2013, higher variable-based compensations paid to chiefs and supervisors of sales were recorded, mainly related to a higher activity associated with the commercial distribution plan.
Average administrative staff amounted to 1,070 workers in fiscal year 2013, a 12.0% increase from an average administrative staff of 956 in 2012. Total staff as of December 31, 2013 was 1,136, an 11.0% increase over 1,023 total staff as of December 31, 2011.
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Total wages and salaries to sales personnel amounted to MCh$14,959 in fiscal year 2013, an increase of MCh$4,660 or 45.2% as compared to fiscal year 2012. Such increase was caused by a larger staff as a result of the implementation of a new distribution model (since August 2012) destined to improve the sales agents’ profiles, who will later become pension advisors. The latter involved higher expenses in fixed compensations and benefit allowances.
In figures, the average number of sales employees was 760 workers in fiscal year 2013, an increase of 42.0% with respect to the average number maintained in fiscal year 2012 (535 sales agents). By comparing the end of each period, the sales force increased by 23.4% from 717 salespeople in December 2012 to 885 in December 2013.
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Short-term benefits to employees were MCh$3,545 in fiscal year 2013, increasing by MCh$1,691 or 91.2% as compared to fiscal year 2012 due to higher variable base compensation related to a larger number of staff with regard to goal achievements.
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Severance indemnities paid in fiscal year 2013 were MCh$3,434, an increase of MCh$1,811 or 111.6% with respect to fiscal year 2012, which was driven by higher indemnities of Ch$1,834 paid to administrative personnel, aimed at strengthening the Company’s structures and processes.
Depreciation and amortization expenses totaled MCh$13,601 in fiscal year 2013, an increase of MCh$4,925 or 56.8% with respect to 2012. This increase was caused by higher amortization expenses recorded in the period.
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Amortization expense was MCh$11,362 in fiscal year 2013, an increase of MCh$5,120 or 82.0% with respect to fiscal year 2012. This increase was due to software that was written down as a part of future technology replacements for the integration process with MetLife, Inc.
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Depreciation expense was MCh$2,240 a decrease of MCh$195 or 8.0% with respect to fiscal year 2012. This result was mainly the outcome of lower depreciation of real estate, since fiscal year 2012 the Company recorded amortization costs related to restructuring works of real estate sold to BBVA Chile.
Impairment losses were MCh$65, involving a positive deviation of MCh$249 as compared to impairment losses recorded in fiscal year 2012. The Company generally performs real estate impairment every three years unless evidence of impairment shows need for an earlier assessment. In fiscal year 2012, such testing resulted in an impairment loss for certain properties, while in fiscal year 2013 the impairment losses were just related to receivable accounts.
Miscellaneous other operating expenses were MCh$35,746 in fiscal year 2013, an increase of MCh$3,812 or 11.9% with respect to fiscal year 2012 due to the following:
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Administration expenses were MCh$25,376 in fiscal year 2013, an increase of MCh$2,442 or 10.6% as compared to fiscal year 2012. This increase was partly attributable to expenses incurred in the Company’s rebranding process (e.g., restructuring of branch offices, holding internal events and replacing outdated material). Additionally, the period recorded higher operational write-offs related to reviews made by the Superintendency that required some participants compensation.
The aforementioned was partially offset by lower expenses for advisory services stemming from the amendment of the BBVA Servicios Corporativos Contract made in September 2012 that significantly reduced the scope of services provided, which translated into lower tariffs on such contract. This contract ended in September 2013 and only certain services are going to be maintained as transaction service agreements.
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Marketing expenses were MCh$3,466 in fiscal year 2013, an increase of MCh$1,582 with respect to fiscal year 2012. This increase was primarily the result of rebranding expenses associated with printing new brochures and forms used in branch offices. In addition, the period recorded higher expenses in publicity mainly promoting campaigns and written media.
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Data processing expenses were MCh$4,007 in fiscal year 2013, an increase of MCh$105 or 2.7% with respect to fiscal year 2012, basically related to maintenance costs in equipments and devices in connection with IT requirements.
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Other operating expenses are associated with expenses incurred for evaluation and qualification of disability status of participants and compensation of the Board of Directors, which amounted to MCh$2,896 in fiscal year 2013, a decrease of MCh$317 or 9.9% with respect to fiscal year 2012, given the decrease of beneficiaries that remain for financing disability evaluations related to the January 2005 – June 2009 policy.
Other income (expenses)
Financial income (expenses) was MCh$2,177 million in 2013, a decrease of MCh$739 with respect to fiscal year 2012, since the Company distributed additional dividends so its liquidity level decreased.
Share of profit (loss) of associates accounted for using equity method was MCh$8,024 in the fiscal year 2013, a decrease of MCh$5,209 million or 39.4% with respect to fiscal year 2012. This result is explained by lower share of profits for MCh$7,667 due to the sale of equity interests held in AFP Horizonte in Peru and AFORE Bancomer in Mexico in fiscal year 2013. This decrease was partially offset by the positive results of MCh$2,457 achieved by our local associates.
Exchange differences recorded gains for MCh$86 in the fiscal year 2013, rising by MCh$96 with respect to losses recorded in fiscal year 2012. This result was attributable to the Chilean peso depreciation against U.S. dollar (9.3%)
over the asset balances temporarily maintained due to the affiliated companies sales.
Other non-operating income was MCh$68,594 in fiscal year 2013, an increase of MCh$63,693 as compared to fiscal year 2012. This result was basically attributable to profits before taxes stemming from the sale of equity interests held in associates AFORE Bancomer in Mexico (MCh$38,755) and AFP Horizonte in Peru (MCh$26,834).
Other non-operating expenses were MCh$723 in fiscal year 2013, increasing by MCh$384 with respect to fiscal year 2012. This result was basically due to higher expenses in the provision made for litigations.
Income tax expense
Income tax expense was MCh$29,567 in fiscal year 2013, higher by MCh$4,061 or 15.9% compared to fiscal year 2012. This result was explained by higher profits before taxes which were offset by no change in tax rates affecting deferred taxes as compared to the one recognized in fiscal year 2012. In fiscal year 2012, the application of the new tax regulation (September 2012) increased the recurring income tax rate from 18.5% to 20.0%, so the deferred tax rate increased from 17.0% to 20.0%. The latter implied higher tax expenses of MCh$5,763 for September 2012, including both income tax by MCh$1,033 and deferred tax by MCh$4,729.
Profit
During fiscal year 2013, the Company recorded a profit of MCh$140,086, an increase of MCh$36,052 or 34.7% as compared to the profit attained in the fiscal year 2012, due to profits generated from the sale of equity interests held in foreign associates AFORE Bancomer in Mexico and AFP Horizonte in Peru (MCh$53,321, net of taxes) and higher revenues of MCh$8,045 mainly boosted by higher fee income (MCh$8,806).
Provida recorded a profit after taxes of MCh$104,034 for the year ended December 31, 2012, an increase of 31.9% as compared to the profit after taxes of MCh$78,855 for the year ended December 31, 2011.
The following is a year-to-year comparison by major income statement line item for the years ended December 31, 2012 and 2011.
Revenues from operations
In fiscal year 2012, total revenues from operations were MCh$178,233, an increase of MCh$28,454 or 19.0% as compared to the prior fiscal year. This increase was caused by higher gains from mandatory investments of MCh$17,984, and higher revenues of MCh$10,470. An explanation of variations for each class of revenues from operations for the fiscal year 2012 as compared to the fiscal year 2011 is described below:
In fiscal year 2012, revenues were MCh$163,718, an increase of MCh$10,470 or 6.8% with respect to the fiscal year 2011. This increase is mainly explained by higher fee income of MCh$13,056, as the period recorded increased revenues from mandatory contributions. The above was partially offset by lower other revenues of MCh$2,586, due to lower financial revenues from the life and disability insurance premium, as well as, lower fees received by AFP Genesis in Ecuador.
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Fee income was MCh$153,415 in fiscal year 2012, an increase of MCh$13,056 (9.3%) as compared to fiscal year 2011. This increase was mainly attributable to higher mandatory contributions as a result of higher participant’s salary base (8.8%), due to the increase in the taxable income of contributors. In addition, the period recorded higher mandatory fee income received from the regularization of residual and unprocessed contributions from previous periods made by the Social Pension Institute.
As a result of the previously mentioned growing trend of its participants’ salary base previously mentioned, Provida has maintained its leading position in the pension industry with an average market share of 38% in terms of number of participants, 35% in terms of contributors, 28% in terms of salary base and 29% in terms of total assets under management in the fiscal year 2012. In figures, the average number of contributors was 1,796,516; the monthly average salary base was around MUS$1,659, and the assets under management were MUS$46,133 as of December 31, 2012.
Other revenues were MCh$10,303 in fiscal year 2012, decreasing by MCh$2,586 (20.1%), with respect to fiscal year 2011. This decrease was attributable to lower financial revenues of MCh$1,198 (55.7%) stemming from the life and disability insurance. This result was boosted by lower cash flows administered by the Company, given the payment of casualties related to the insurance policy currently in a runoff stage; and lower returns obtained in the period. Likewise, lower other revenues of MCh$1,388 (12.9%) were recorded, basically due to lower revenues from operations attained by the associate Genesis in Ecuador.
In fiscal year 2012, there was a gain from mandatory investments of MCh$14,515, an increase of MCh$17,984 with respect to the losses recorded in fiscal year 2011. The weighted average nominal return of pension funds was +7.27% in fiscal year 2012 as compared to the negative nominal return of -1.44% recorded in fiscal year 2011. The main contributions in the year 2012 were made by Fund Type C (44% of the gains) with a nominal return of +7.18% and Fund Type B (18% of the gains) with a nominal return of +7.54%.
The positive overall return in the year was triggered by the gains recorded in the foreign stock markets (MSCI World +13.6%: Japan +24.4%, USA +13.8%, Europe +8.8%; MSCI Emerging +15.0%: Mexico +17.7%, China +16.0%, Russia +10.9%, Brazil +7.0%), and the local stock market (IPSA +3.0%).
Expenses from operations
In fiscal year 2012, total expenses from operations were MCh$69,364, an increase of MCh$2,213 or 3.3% as compared to the prior fiscal year. This increase was caused by higher personnel expenses of MCh$1,552, superior miscellaneous other operating expenses of MCh$1,269, higher costs incurred in depreciation and amortization of MCh$469 and increased impairment losses of MCh$315. These increases were partially offset by the gain recorded by the premium of the life and disability insurance, with a positive variation of MCh$1,392 An explanation of variations for each class of expenses from operations for fiscal year 2012 as compared to fiscal year 2011 is provided below.
Life and disability insurance premium expense recorded a gain of MCh$3,718 in fiscal year 2012, with a positive variation of MCh$1,392 as compared to the gain recorded in fiscal year 2011.
As of 2012, most existing casualties have been paid, hence there has been a permanent decline in the level of reserves for casualties, mainly due to the settlement of casualties as the contract is in a run-off stage and neither new premiums nor new claims will be covered.
As a result of the monthly analysis regarding the reserve fluctuation, it was concluded that the speed of payment of casualty claims was higher than the one previously estimated, thus the fluctuation of long term discount rates had a lower effect over the value of reserves. Consequently, it was determined that the provision calculated by the model as of December 2011 should be reduced according to the development of the reserve amount. Such adjustment involved a reversal of MCh$4,047 in provisions for casualties, higher by MCh$1,351 as compared to the figure recorded in 2011.
Employee expenses amounted to MCh$32,157 in fiscal year 2012, an increase of MCh$1,552, or 5.1%, as compared to fiscal year 2011. This result was driven by higher wages and salaries of sales and administrative personnel, which was partially offset by lower short term benefits.
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Total wages and salaries to administrative personnel were to MCh$18,381 in fiscal year 2012, increasing MCh$1,094 or 6.3% as compared to 2011. This result was basically attributable to higher expenses incurred in fixed salaries as the period had a greater staff due the transfer of 92 people from BBVA Servicios Corporativos towards Provida’s permanent personnel in September, 2012. Additionally, the period recorded higher variable-based salaries paid to chiefs and supervisors of sales, mainly related to awards of the commercial plan; a higher provision for accrued vacation for the greater staff, as well as lower use of vacations; plus higher amounts of legal contributions due to the increased salaries paid in the period. The above was partially offset by lower expenses in overtime (a greater control over them), and lower expenses in training, specifically trips, accommodation and food.
In figures, the average administrative staff amounted to 956 workers in fiscal year 2012, while in fiscal year 2011 it was 909, an increase of 5.1%. By comparing the end of each period, the administrative staff increased by 11.1%, from 921 in December 2011 to 1,023 workers in December 2012.
Total wages and salaries to sales personnel amounted to MCh$10,299 in fiscal year 2012, a decrease of MCh$1,092 or 11.8% with respect to fiscal year 2011. This variation was basically caused by higher variable compensation paid, attributable to increased commission, awards and participations paid to sales agents, and higher fixed compensation and increased benefit allowances, as a consequence of a greater staff maintained in the period. In addition, the period recorded a higher provision for accrued vacations as a consequence of lower use of them and also a larger staff.
In figures, the average number of sales employees was 535 workers in fiscal year 2012, an increase of 23.5% with respect to the average number maintained in fiscal year 2011 (433 sales agents). By comparing the end of each period, the sales force increased by 67.1% from 429 salespeople in December 2011 to 717 in December 2012. It is worth noting that the Company has incorporated approximately 250 sales agents since August 2012 in connection with the business plan previously discussed.
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Short-term benefits to employees were MCh$1,854 in fiscal year 2012, decreasing by MCh$646 or 25.8% as compared to fiscal year 2011 due to lower provisions required for bonuses. These lower provisions were attributable to the fact that the Company has enough stock for the profits attained in the period as surplus from last year after the payments made.
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Indemnities paid in fiscal year 2012 were MCh$1,623, an increase of MCh$12 or 0.7% compared to fiscal year 2011. This figure was composed of indemnities paid both, to sales personnel (MCh$460) and to administrative personnel (MCh$1,163).
Depreciation and amortization expenses totaled MCh$8,676 in fiscal year 2012, an increase of MCh$470 or 5.7% with respect to fiscal year 2011 mainly due to the following:
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Depreciation expense was MCh$2,435 in fiscal year 2012, an increase of MCh$82 or 3.5% compared to fiscal year 2011. This increase was mainly caused by higher depreciation of real estate due to the amortization of restructuring works in properties sold to BBVA Chile S.A. The above was partially offset by lower depreciation of computer hardware and building for own use.
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The amortization expense was MCh$6,241 in fiscal year 2012, an increase of MCh$388 or 6.6% with respect to fiscal year 2011. The variation was attributable to higher amortization costs in intangibles, associated with internal development enhancements made in the Unified Platform.
Impairment losses were MCh$315 in fiscal year 2012, an increase for the same amount, since the fiscal year 2011 did not record any amount for this concept. It should be mentioned that the Company implemented a policy aimed at assessing its principal fixed assets (real estate over MCh$40) every three years or earlier if there is any information of impairment.
Miscellaneous other operating expenses were MCh$31,934 in fiscal year 2012, an increase of MCh$1,269 or 4.1% compared to fiscal year 2011 due to the following:
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Marketing expenses were MCh$1,884 in fiscal year 2012, an increase of MCh$100, or 5.6%, compared to fiscal year 2011. This increase was caused by higher expenses in marketing recorded by AFP Genesis in Ecuador (MCh$119) administration during the last quarter of 2012, mainly related to advertising in response to a higher level of competiveness exhibited in the Ecuadorian business of fund management.
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Data processing expenses were MCh$3,902 in fiscal year 2012, an increase of MCh$108 or 2.8% with respect to fiscal year 2011. This result was caused by higher hardware and software maintenance costs with related companies, as the period recorded higher expenses with the Regional Computer Center (CCR) in Mexico due to larger volumes of operations; as well as cost of maintenance of other equipment and installations referred to help desk and commercial support services. The latter was partially offset by lower expenses in liaison services with branch offices, as fees and services provided by Movistar were reviewed, hence reducing the applicable monthly expense applicable for fiscal year 2012.
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Administration expenses were MCh$22,935 in fiscal year 2012, an increase of MCh$796 or 3.6% compared to fiscal year 2011. This increase was mainly attributable to a provision (MCh$1,400) made in December 2012 for write-offs, as the Superintendency of Pensions requested to make certain reviews. The latter was partially offset
by lower expenses in advisories due to the amendment of the services rendering contract subscribed with BBVA Servicios Corporativos Limitada, starting in September 2012, which reduced the rendered services and, thus, the cost was reduced from UF 241,109, to UF 41,932 (equivalent to MCh$5,439 and MCh$946, respectively). This lower cost was intended to offset the increased expenses in compensation of the administrative staff previously explained.
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Other operating expenses are associated with expenses incurred for evaluation and qualification of disability status of participants and compensation of the Board of Directors, which amounted to MCh$3,213 in fiscal year 2012, higher by MCh$266 or 9.0% with respect to the fiscal year 2011. This result was explained by higher expenses in evaluation and qualification of disability, related to medical fees and clinical examinations for those casualties still pending belonging to the disability contract (currently in run-off); as well as claims of participants not covered by the current insurance system whose disability determinations must be financed by the AFPs according the regulation.
Other income (expenses)
Financial income (expenses) was MCh$2,916 in fiscal year 2012, an increase of MCh$1,363 or 87.8% with respect to fiscal year 2011, due to the higher liquidity levels for the Company obtained from such investments, which were invested in deposits with higher interest rates than those in 2011.
In the fiscal year 2012, share of profit (loss) of associates accounted for using equity method was MCh$13,233, an increase of MCh$3,522 or 36.3% with respect to fiscal year 2011. This increase was the outcome of better results generated by all associates, excepting the local associate DCV. Locally, the associates contributed in the aggregate of MCh$1,842, given the higher fees on sales generated by Previred, but mainly higher fee income from AFC. After BBVA Group announced to the market on May 24, 2012 its strategic review of alternatives for its mandatory pension fund administration business in Latin America, Provida Internacional began to consider sales alternatives for its interests in AFORE Bancomer and AFP Horizonte and, therefore, classified these investments as assets held for sale on its balance sheets at the end of November 2012. As a result,
our financial statements include profits realized by these assets during the 11-month “held for sale” period, representing an increase compared to year 2011 of MCh$1,220 with respect to AFP Horizonte in Peru and MCh$460 with respect to AFORE Bancomer in Mexico. In each case these profits were due to higher gains from mandatory investments and increased fee income at these companies.
In the fiscal year 2012 exchange differences recorded losses for MCh$10 for the year ended in December 2012, negative by MCh$132 with respect to the gains recorded in 2011. This result was attributable to losses in exchange rate as the Chilean peso appreciated 7.6% against the dollar (v/s the depreciation of 10.9% in 2011) which negatively affected its net position in assets held in dollars. Additionally, the period recorded lower gains in UF fluctuation due to a 2.5% increase in its valuation, which was less than the increase of 3.9% registered in 2011, affecting the net position of assets adjusted by UF.
Other non-operating revenues were MCh$4,901 in fiscal year 2012, an increase of MCh$1,852 or 60.7% as compared to fiscal year 2011. This result was attributable to the profit from the sale of real estate assets not used by the Company. In addition, reimbursements were recorded during the period related to the earthquake that occurred in February 2010. The period also recorded reversals of provisions from previous periods, mainly in labor litigation which were finally determined as favorable for the Company. Provisions for labor suits are accounted for as other operating expenses, but the reversal of provisions corresponding to previous periods must be accounted for as revenues.
Income tax expense
Income tax expense was MCh$25,506 in fiscal year 2012, higher by MCh$7,794 or 44.0% compared to fiscal year 2011. This result was driven by a higher tax expense caused by higher profits before taxes, and the implementation of the new tax law beginning in September 2012. As a consequence, the taxable profit for the year 2012 and thereafter will be affected by a higher tax rate, increasing from 18.5% to 20.0%. Additionally, the tax rate related to deferred taxes, increased from 17.0% to 20.0% due to the fact that gains from mandatory investments are estimated to be taxable in the long term. The effect of the change in the tax rate was MCh$6,721 for 2012, affecting the current tax by MCh$1,577, as well as the deferred tax by MCh$5,144.
As compensation, the Company acknowledged a deferred tax asset of MCh$1,465 with the applicable credit in the taxes of the period in December 2012. Such amount was generated by the reclassification effect of the associates AFORE Bancomer in Mexico and AFP Horizonte in Peru, as assets available for sale on the balance sheet in November 2012, due to the difference between the taxable and financial values of such investments.
Profit
During fiscal year 2012, the Company recorded a profit of MCh$104,034, an increase of MCh$25,179 or 31.9% compared to the profit recorded in fiscal year 2011. This increase was basically caused by gains from mandatory investments and the results obtained from the Company’s recurring business, defined as revenues minus life and disability insurance premium, personnel expenses and miscellaneous other operating expenses, which increased by 9.6% or MCh$9,040 with respect to the fiscal year 2011.
The Company’s principal uses of funds are payments of personnel remunerations and other expenses from operations, replenishment of mandatory investments and dividend payments. Provida has financed these expenses by using cash generated from its operations, as well as through short-term debts. Management considers that these sources of funds will be sufficient to finance contemplated capital requirements, as well as payments of its obligations. Due to the nature of its business, Provida has significant cash flows related to fees received from mandatory and voluntary pension savings, which are expected to remain at similar levels as those recorded in recent years. Additionally, management considers that the expected growth of its customer portfolio will continue to increase its working capital requirements, for which,
the Company would be well positioned to finance such requirements.
In 2013, the net variation in cash and cash equivalents was positive by MCh$3,784 (MUS$7), due to net positive cash flows originated by operations and investments activities, but it was partially offset by the net negative cash flows originated by financing activities. In 2012, the net variation in cash and cash equivalents was positive by MCh$5,153 (MUS$10), due to net positive cash flows originated by activities from operations, but it was partially offset by the net negative cash flows originated by financing activities. In 2011, the net variation in cash and cash equivalent was negative by MCh$1,074 (MUS$2) due to net negative cash flows originated from financing and investment activities, which was partially offset by the positive cash flows originated from operations.
In 2014, Provida expects that the major cash outflows may include:
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Budgeted capital expenditures of MCh$8,300 (MUS$15.8); and
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Budgeted dividends of MCh$42,026 (MUS$80).
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Regarding payments and refinancing of short-term contractual obligations, the Company will generate enough resources to comply with its operating cycle. Therefore, Provida does not expect to require short term financing.
Moreover, capital requirements for 2014 are expected to be financed through the combination of the existing capital sources and cash flows generated by operations. In terms of external financing, the Company does not foresee long-term financing needs. The financing of working capital is expected to be covered by Provida’s own resources, since Provida has generated significant cash flows from its operations and a portion of the related profits has remained in the Company. See “D. Tabular disclosure of contractual obligations.”
Sources and uses of funds
Cash and working capital. The Company has recorded positive working capital of MCh$16,225 (MUS$31), MCh$61,523 (MUS$117) and MCh$29,062 (MUS$55) as of December 31, 2013, 2012 and 2011, respectively. This result for 2013 was mainly related to an increase in legal minimum dividend obligations (equal to 30% of the profits attained in the period) due to the sale of equity interests held by Provida Internacional. In previous years, this figure was affected by the higher liquidity levels of the Company as the obligation of the life and disability insurance has been gradually
extinguished, as well as revenues generated by the recurring business.
Net cash provided by operating activities. Net cash provided by operating activities was MCh$80,447 in 2013, representing a decrease of MCh$13,518 with respect to net cash provided by operating activities in 2012. This decrease was mainly explained by the following: (i) higher remunerations paid of MCh$8,517 due to the increase in staff; (ii) higher income taxes paid of Ch$8,363, basically due to increased local taxes paid on the sale of foreign associates, and (iii) higher payment to suppliers of MCh$3,912. The aforementioned was partially offset by higher fee income collected of MCh$8,523.
In 2012, net cash provided by operating activities was MCh$93,965 in 2012, representing an increase of MCh$8,018 with respect to net cash provided by operating activities in 2011. The increase was explained by the following: (i) higher fee income received of MCh$13,059 with respect to 2011, mainly sustained by the higher client’s salary base in the year, (ii) higher other inflows from operations of MCh$1,027 with respect to 2011; and (iii) higher other proceeds from interests of MCh$1,455, as well as from dividends of MCh$1,239. The above was partially offset by (i) higher other outflows from operations of MCh$4,705 and (ii) higher payments on income tax of MCh$3,875.
Net cash provided by investing activities. Net cash provided by investing activities was MCh$106,547 in 2013, increasing by MCh$104,360 as compared to 2012. The increase was mainly related to higher proceeds of MCh$94,201 received from divestitures of associates due to the sale of AFORE Bancomer in Mexico and AFP Horizonte in Peru, and higher other cash inflows from investing activities of MCh$10,400. The above was partially offset by higher payments for acquiring shares from mandatory investments of MCh$4,789.
In 2012, net cash provided by investing activities was MCh$2,187 in 2012, increasing by MCh$18,747 as compared to 2011, when MCh$16,560 was used in investing activities. The increase in funds from investing activities in 2012 was mainly related to (i) lower other cash outflows of MCh$13,103 paid in 2012 as compared to 2011, referred to investments in time deposits, (ii) superior other cash inflows of MCh$4,797 and (iii) higher proceeds received from disposal of property, plant and equipment of MCh$2,336 as compared to 2011.
Net cash used in financing activities. The Company’s net cash used in financing activities amounted to MCh$183,211 in 2013, increasing by MCh$92,212 as compared to 2012. This increase is basically explained by higher dividends paid to shareholders of MCh$91,165 due to the final dividend paid corresponding to 2012, as well as extraordinary dividends paid associated with the excess of cash flows attributable to both, sales of equity interests in associates and the recurring business.
In 2012, the Company’s net cash used in financing activities increased by MCh$20,537 in 2012, from MCh$70,461 in 2011 to MCh$90,998 in 2012. The increase in cash used in financing activities is mainly attributable to dividends paid to shareholders of MCh$91,649 in 2012, which were higher by MCh$21,889 with respect to 2011.
During the last three years, Provida’s most important contractual obligations were those related to the contract for outsourcing services with BBVA Servicios Corporativos. This contract was amended in September 2012 in terms of fees and finally in September 2013 it was terminated due to the change of Provida’s controlling shareholder. The rest of the outsourcing obligations represent payments with a one-month lag. Therefore from year 1 onwards there is no associated obligation. Please see Note 26 to the audited Consolidated Financial Statements.
In previous years, Provida’s most significant contractual obligation related to the life and disability insurance policy entered into with BBVA Seguros de Vida S.A. Beginning in June 2009, as per the modification introduced by the Pension Reform Law in relation to the joint bidding process of the life and disability insurance, the AFPs are no longer responsible for such insurance thus, premiums originally established with the life insurers for granting benefits are not paid by AFPs, but AFPs are responsible for casualties under coverage until June 30, 2009. Currently, the Company and BBVA Seguros de Vida S.A. are negotiating the definite balance of this insurance policy.
The use of the banks’ credit lines overdrafts is used to finance business operations. As of December 31, 2013, the unused lines of credit amounted to MCh$62,000. Finally, Provida’s capital leases are basically connected with the financing of property, plant and equipment.
Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
None of the above mentioned Directors individually owns one percent or more of shares in Provida.
(2)
As provided in Article 32 of Law 18,046 of the Chilean Corporation Law, at the Extraordinary Board of Directors’ meeting held on October 2, 2013 Mr. Joaquín Cortez Huerta, Mr. Jesús del Pino Durán, Mr. Luis Fernando Ferreres Crespo, Mr. Francesc Jorda Carré and Mr. José Martos Vallecillos submitted their resignations as a result of the change of Provida’s ultimate parent. At the same meeting Mr. Víctor Hassi Sabal, Mr. Jorge Carey Tagle, Mr. Jaime Martínez Tejeda, Mr. Martin Enrique Galli and Mr. Carlos Alberto Olivieri were appointed as new Provida’s Directors. Notwithstanding, during the next Shareholders’ meeting to be held on April 30, 2014, the Board of Directors will be entirely renewed.
Víctor Hassi Sabal is the Chairman of the Board and has been Director of Provida since October 2013. He received a civil mining engineering degree from the University of Santiago of Chile and a Master of Science from Northeastern University in the United States.
Jorge Carey Tagle is the Vice-Chairman of the Board and Director of Provida and has been Director of Provida since October 2013. He received a degree in law from the Catholic University of Chile and a Master in comparative law from the New York University in the United States.
Jaime Martínez Tejeda is Director of Provida since October 2013. He received a degree in law from the Catholic University of Chile.
Martín Enrique Galli is Director of Provida since October 2013. He is a university graduate in mathematics from the University of Buenos Aires, Argentina and a master of finance from the CEMA University, in Buenos Aires, Argentina.
Carlos Alberto Olivieri is Director of Provida since October 2013. He received a general accounting degree from Rosario National University in Argentina.
María Cristina Bitar Maluk is Director of Provida since 2010. She received her economics degree with a minor in Sociology from Dartmouth College in the United States, a Master of Business Administration from Tulane University, United States, and a Master of Business Administration from the University of Chile.
Jorge Marshall Rivera is Director of Provida since 2010. He received his commercial engineering degree from the University of Chile and an economics degree from Harvard University in the United States. During 2009, he was an Alternate Director of Provida.
Osvaldo Puccio Huidobro is Alternate Director of Provida since 2010. He received a philosophy degree from the University of Humboldt in Berlin, Germany.
None of the above mentioned Executive Officers individually owns one percent or more of shares in Provida.
(2)
On June 1, 2013, Mr. Cristóbal Torres Egaña was appointed as Provida’s Chief Investment Officer, replacing Mr. Gonzalo Camargo Cárdenas who submitted his resignation due to personal reasons.
Ricardo Rodríguez Marengo is Chief Executive Officer since 2007. He received a business management degree from the Catholic University in Argentina.
Cristóbal Torres Egaña is the Chief Investment Officer since June 1, 2013. He received an industrial engineering degree from the Catholic University of Chile and an MBA from Yale University, USA. Between June 2010 and May 2013, he served as a Fixed Income Manager for AFP Provida.
Carlo Ljubetic Rich is Chief Commercial Officer since 2000. He received an industrial engineering degree from the University of Santiago of Chile.
Magaly Pacheco Mena is the Chief Operation Officer since 2010. She received her civil industrial engineering degree from the University of Chile. Between 2009 and 2010, she performed as Manager of Operational Projects for AFP Provida and previously between 2008 and 2009 she performed as Benefit Administration Manager for AFP Provida.
Andrés Veszprémy Schilling is the General Counsel since 2012. He received a law degree from the University of Chile and a Master of Laws in International Legal Studies from the American University, USA. Previously, he had also served as General Counsel of AFP Provida since 2002 until March 2009.
Pablo Villalobos Astudillo is the Audit Manager since 2012. He received his statistic degree and general accountant degree from the University of Chile. Between 2006 and 2012, he served as Manager in the following areas: Branch Audit Manager, Credit Risk and Special Audits in the BBVA Bank.
Marco Rivera Araya is Human Resources Manager since 2012. He received a commercial engineering from University of Santiago of Chile.
María Paz Yáñez Macías is the Chief Financial Officer since 2013. She received a commercial engineering degree from the Catholic University of Chile. Between 2002 and 2013 she was serving as the Planning & Control Division for AFP Provida.
Iván Baeza Galaz is the Marketing Manager since 2007. He received a civil industrial engineering degree from University of Chile. Between 1999 and 2007, he served as the Chief of the Commercial Development Department for AFP Provida.
Santiago Donoso Hue is the Risk Manager since 2012. He received a commercial engineering degree from Los Andes University, Chile. Between 2007 and 2012 he performed as the Deputy Manager of Risk for AFP Provida.
Serge Tempel Nudel is the Strategy and Business Development Manager since December 2013. He received a civil industrial engineering degree from the University of Chile and a MBA from HEC School of Management, in Paris, France.
Our Directors earn a per diem for the activities in which they participate. The total per diem compensation paid by Provida to all Directors during the fiscal year 2013 was an aggregate of MCh$528, a 2.8% decrease year-over-year. The detail of per diem paid in 2013 was as follows:
(1) Mr. Joaquín Cortés Huerta, Mr. Jesús del Pino Durán, Mr. Luis Ferreres Crespo, Mr. Francesc Jordá Carré and Mr. José Martos Vallecillos, received per diem in 2013 until cessation of their services as Directors on October 2, 2013.
The aggregate compensation of Provida’s senior management during fiscal year 2013, including 23 managers, 17 deputy managers and 20 department chiefs, was MCh$5,892. Severance payments made during 2013 to all executives who left the Company for different reasons totaled MCh$731.
The Company has maintained the plan of variable incentives known as “Direction Oriented to Results” (DOR) currently implemented for managers and department chiefs. This evaluation system is focused on the employees’ reaching certain quantitative and tactical objectives previously set for each executive. Its payment is conditioned on the level of specific goal achieved and the contribution made by each executive, which is calculated using a methodological evaluating process.
Provida is subject to strict norms of corporate governance established by Chilean law, to applicable regulations, and to the policies, rules and conduct code ruling its activity. Provida is administered by a Board of Directors that ordinarily meets once a month. In accordance with the Company’s by-laws, the Board of Directors consists of seven regular members and two alternate members elected for a two-year term in the Ordinary Shareholders’ meeting. Cumulative voting is permitted for the election of Directors. Under Chilean law, a company’s executive officers may not serve as such company’s directors. As a result, Provida’s Board consists entirely of “non-executive” directors.
The Pension Reform Law incorporates additional limitations over executives that might be designated as directors of AFPs and the requirement that at least two of the Board of the Directors’ members be considered as autonomous. Since October 2008, Directors and/or executives of other AFPs, banks or financial institutions, stock exchanges, stock intermediaries, administrators of investments funds, administrators of mutual funds or insurance companies may not be appointed Director of an AFP. Directors of other companies, foreign or local, that belong to the business conglomerate, may not be appointed Director of an AFP. A Director will be considered as autonomous when he or she has no relationship with the AFP, the other corporations of the conglomerate of which he or she takes part in, its controlling shareholder, and principal executives of any of such companies that might generate a potential conflict of interest or hinder
his/her independence from the conglomerate.
As a consequence of modifications introduced by Law Nº20,382 regarding Corporate Governance in the Chilean Corporation Law, Directors of Corporations, such as AFPs, complying with certain requirements must also meet independence criteria established by this law, similar to those criteria established in Law Nº 20,255 –the Pension Reform Law- in relation to the autonomous nature of a Director. Two of the current Directors of Provida meet the requirements of autonomy and independence as per the applicable Chilean Law.
Directors’ Committee
The concept of a “Directors’ Committee” was introduced by Law N° 19,705 passed on December 2001 (which regulates public share offerings and conflicts of interest) and Circular 1,956 passed in February 2001 by the SVS. At the Board of Directors’ meeting held on May 29, 2001, Provida elected the members for its first committee, starting meetings on the same date. This committee assumed functions formerly carried out by the Audit Committee.
At the beginning of 2010, the Law Nº20,382 on Corporate Governance became effective, which modified the Chilean Corporation Law by instructing the Corporations satisfying certain requirements appointed in such law, to have a Directors’ Committee composed of three members, with a majority being independent. In this context, during the Extraordinary Shareholders’ meeting held on October 2, 2013, Provida elected the new members of the Directors’ Committee; two of them met the requirement of independence as determined by the applicable Chilean laws.
Under Provida’s by-laws and Chilean Corporation Law, the responsibilities of the Directors’ Committee include: proposing external auditors; examining reports made by the external auditing firm; approving additional services to be provided by the external auditing firm; analyzing reports made by the Audit of Provida; reviewing resolutions and notes issued by regulatory organizations; reviewing the report on the implementation of financial controls; reviewing and evaluating the plan by Provida’s Audit for the year and analyzing information in connection with operations included in articles 147 et seq. of Law N° 18,046 for Corporations, suggesting approval of transactions with related parties that shall be laid under their knowledge.
The members of the Directors’ Committee are elected by the Board of Directors. Until October 1, 2013, the Directors’ Committee consisted of Mr. Jesús del Pino Durán, who was also designated as the “financial expert” of the Directors’ Committee; Mrs. María Cristina Bitar Maluk and Mr. Jorge Marshall Rivera. On October 2, 2013, as per the resignation of Mr. Jesús del Pino Durán, Mr. Jaime Martínez Tejeda was appointed in his replacement. Mrs. María Cristina Bitar Maluk and Mr. Jorge Marshall Rivera remained in their positions, and Mr. Marshall was designated as the new “financial expert” of the Directors’ Committee. This Committee met 17 times in 2013 in which meetings, the following persons were also in attendance: the Chief Executive Officer, Mr. Ricardo Rodriguez and the Committee Secretary.
At the Ordinary Meetings when an audit report is submitted, the Audit Manager also attends. Occasionally, the partners of the external auditing firm, Deloitte and managers of the various AFP Provida
also attend. While not required to do so under Chilean law, the Directors’ Committee has the necessary power and authority to hold committee meetings without the presence of the CEO or other members of management.
The Directors’ Committee carried out various activities during 2013, among which were: (i) review of the report made by external auditors, the balance sheet and the remaining financial statements for the period between January 1, and December 31, 2012; (ii) review of reports prepared by the external audit firm; (iii) analysis of reports submitted by the internal audit of AFP Provida; (iv) analysis of resolutions and general notes issued by the Superintendency of Pensions; (v) review and evaluation of the Internal Audit Plan’s compliance for the year 2012; (vi) review and approval of the Audit Plan for 2013 and the monthly review of its compliance; and (vii) review of information relate to transactions referred to in Articles 147 and others of Law 18,046 by suggesting the approval of transactions with related parties that were submitted to.
During the fiscal year 2013, the Directors’ Committee incurred in expenses amounting to MCh$54 additional to those expenses in relation to the compensation of its members. The total fees paid in 2013 for participation in the Directors’ Committee was as follows:
Fees
Directors
(MCh$)
Jorge Marshall Rivera
29
María Cristina Bitar Maluk
29
Jesús del Pino Durán
21
Jaime Martínez Tejeda
6
Total
85
Committee of Investment and Conflict of Interest Resolution of AFP Provida’s Board of Directors
AFP Provida S.A. has a Committee of Investment and Conflict of Interest Resolution that until October 1, 2013, was comprised by the directors Mr. Joaquín Cortez Huerta, Mrs. María Cristina Bitar Maluk and Mr. Jorge Marshall Rivera. Subsequently, on October 2, 2013, and as per the resignation submitted by Mr. Joaquín Cortez Huerta, Mr. Carlos Alberto Olivieri was appointed in his replacement. Mrs. María Cristina Bitar Maluk and Mr. Jorge Marshall Rivera remained in their positions.
Among its functions are: designing an investment policy and a risk profile for each fund type; supervising the implementation of the investment policy approved by the Board of Directors and the investment limits on pension funds established by law; reviewing objectives, policies and procedures with respect to the administration of risk in pension fund investments; examining information regarding the performance of pension funds investing in derivative instruments, foreign investments (equities, fixed income and currencies) and related companies, and issuing an annual report for the Board of Directors regarding such performance; approving the investment in new kinds of assets; allocating assets of each fund type, with special emphasis when allocating assets in the different geographic sectors; granting extraordinary authorization to depart from the investment policy defined by the Board of Directors and other relevant matters.
The Pension Reform Law requires that administrators must establish investment policies for each of the pension fund types administered by them, which will be elaborated by the Board of Directors. In addition, administrators must have a policy to deal with conflicts of interest, which is approved by the administrators’ Board of Directors. Administrators submit, as only one document, a copy of the Policy of Investment and of the Deal with Conflicts of Interest to the User Commission and the Superintendency of Pensions, which publishes it on its website.
The policy to deal with conflicts of interest must, in general terms, address the following matters: (i) internal control rules and procedures that ensure an appropriate management and resolution of conflicts of interest that might affect directors, managers, administrators, and principal executives of the administrator; (ii) confidentiality and the handling of confidential information; and (iii) requirements and procedures for the election of candidates for director positions in corporations in which the pension funds invest.
Significant differences between our corporate governance practices and the NYSE Corporate Governance Standards
Provida’s corporate governance practices are regulated by Chilean law (in particular, Ley sobre Sociedades Anónimas, Law N° 19,705 approved in December 2001, regulating public offerings of securities and governing conflicts of interests; Law N° 20,382 of the Chilean Securities Exchange Act regarding corporate governance standards of public companies which reformed the Chilean Corporation Law and the Chilean Securities Exchange Act; Note N° 1,526 passed in February 2001 by the Superintendency of Securities and Insurance and the Pension Reform Law N° 20,255, among others) in addition to Provida’s by-laws. Since Provida has securities registered with the United States Securities and Exchange Commission (the “SEC”) and listed on the New York Stock Exchange (the “NYSE”), it is subject to the Corporate Governance
standards applicable to “foreign private issuers” (as defined under the United States Securities Exchange Act of 1934, the “Exchange Act”) listed on the NYSE.
In general, foreign private issuers may comply with the corporate governance practices applicable to them in their local jurisdiction instead of the standards required under the NYSE Corporate Governance Standards set out in Section 303A of the NYSE Listed Company Manual. However, foreign private issuers listed on the NYSE must comply with Sections 303A.06, 303A.11 and 303A.12 (b) and (c) of such manual.
Sections 303A.11 requires that foreign private issuers disclose any significant differences in which their corporate governance practices differ from the standards applicable to domestic companies under NYSE listing standards. For the purposes of Section 303A.11, the relevant differences between the corporate governance practices followed by Provida and the NYSE Corporate Governance Standards for U.S. companies are as follows:
NYSE Corporate Governance Standard applicable to domestic listed companies
Corporate governance standards applicable to Provida under Chilean law
Section 303A.01 requires that a majority of the directors of a listed company be independent, such independence being determined in accordance with the criteria in the Section 303A.02.
Under Section 303A.00 Provida is permitted to follow Chilean law in lieu of the relevant Corporate Governance Standard.
The Pension Reform Law (Law N° 20,255) establishes that a board of directors must be composed of a minimum of five directors, two of them being considered as “autonomous” according to the criteria established in the Pension Reform Law. Each autonomous Director must have an Alternate Director that satisfies the autonomy requirements established for regular Directors. The Law N°20,382 regarding Corporate Governance also establishes the independence criteria that a Director of a Chilean Open Corporation must satisfy.
Section 303A.02 sets out the criteria to determine directors’ independence (no director qualifies as “independent” unless, among other things, the board of directors affirmatively determines that the director has no material relationship with the listed company, either directly or as a partner, shareholder or officer of an organization that has a relationship with the company). The board of directors must express its opinion regarding the independence of each director on a case-by-case basis.
Under Section 303A.00 Provida is permitted to follow Chilean law in lieu of the relevant Corporate Governance Standard.
Law N°20,382 introduced improvements to regulations regarding corporate governance standards. Such improvements amended the Chilean Corporation Law, where the independence criteria that a Director of a Chilean Open Corporation must satisfy, are similar to those criteria established in Law N° 20,255 Pension Reform Law. These criteria are described as follows:
The Pension Reform Law (Law N° 20,255) establishes that a director will be considered “independent” when he or she has no relationship with the AFP, the other corporations of the corporate group to which the AFP belongs, its controlling shareholder, and the principal
NYSE Corporate Governance Standard applicable to domestic listed companies
Corporate governance standards applicable to Provida under Chilean law
executives of any of the group companies that might generate a potential conflict of interest or hinder his/her independence. The standards of independence according to the Pension Reform Law are substantially similar to those under the NYSE Corporate Governance Standard. It also establishes that directors and/or executives of an AFP may not be appointed as directors and/or executives of other AFPs, banks or financial institutions, stock exchanges, stock intermediaries, administrators of investments funds, administrators of mutual funds or insurance companies. Additionally, directors of Chilean or foreign corporations belonging to the same corporate group as the AFP may not be appointed as directors of the AFP.
Section 303A.03 requires that non-management directors must meet at regularly scheduled sessions without management.
Under Section 303A.00 Provida is permitted to follow Chilean law in lieu of the NYSE Corporate Governance Standard. Under Chilean law, a company’s executive officers may not serve on such company’s board of directors. As a result, Provida’s Board of Directors consists entirely of “non-management” directors, making separate “non-management” meetings unnecessary.
Section 303A.04 requires that listed companies have a nominating/corporate governance committee composed entirely of independent directors.
Under Section 303A.00 Provida is permitted to follow Chilean law in lieu of the relevant NYSE Corporate Governance Standard.
Provida does not have a nominating-corporate governance committee because neither the applicable Chilean Law nor Provida’s by-laws provide for this requirement. Provida’s shareholders have the right to make director nominations at the ordinary shareholders’ meeting.
Section 303A.05(a) requires listed companies have a compensation committee composed entirely of independent directors. Under Section 303A.05(b), the compensation committee must have a written charter that addresses the committee’s purpose and responsibilities which, at a minimum, are those set out in Section 303A.05(b)(i). In addition, amendments approved by the NYSE in January 2013 require the charter to specify the rights and responsibilities of the compensation committee regarding the authority to retain advisers and to provide funding for such advisers. Certain specified factors must be considered regarding such advisers’ independence from management.
Under Section 303A.00 Provida is permitted to follow Chilean law in lieu of the relevant NYSE Corporate Governance Standard.
Provida has no compensation committee because neither the applicable Chilean Law nor Provida’s by-laws require this.
Under Section 303A.06, the audit committee must satisfy the requirements of Rule 10A-3 of the Exchange Act.
According to the current Chilean Corporation Law, Chilean Open Corporations with an equity market value equal to or greater than UF 1,500,000, and where at least 12.5% of its total voting shares are held by individual shareholders controlling or owning less than 10% of voting shares, must have a Directors’ Committee, as the case of Provida. In conformity with such Law, the Directors’ Committee must be comprised by three members, with a majority satisfying the
NYSE Corporate Governance Standard applicable to domestic listed companies
Corporate governance standards applicable to Provida under Chilean law
independence requirement.
In the Board of Directors’ meeting held on May 29, 2001, Provida’s Board elected its first Directors’ Committee. This Committee assumed the functions of the former Auditing Committee required existing under the Chilean Law, and it has two independent Directors.
Provida’s Directors’ Committee currently satisfies the requirements established in the current Chilean Corporation Law, as well as the requirements of Rule 10A-3 under the Exchange Act. Additionally, Law N° 20,255 requires the formation of a Committee of Investments and Conflicts of Interests Resolution, which must be composed of three directors, at least two of whom must be independent, and one of the independent directors must be Chairman of the Committee.
Under Section 303A.07(a), the audit committees of listed companies are subject to additional requirements, such as knowledge in finances and at least one of its members must have experience in accounting or financial matters. Section 303A.07(b) requires that the audit committee members must satisfy the requirements for independence set out in Section 303A.02. Section 303A.07(c) requires that the audit committee must have a written charter that addresses the duties and responsibilities of the audit committee which, at a minimum, must include those set out in Rule 10A-3 of the Exchange Act and under Section 303A.07(c). Section 303A.07(d) requires that each listed company have an internal audit department to provide management, and the audit committee with ongoing assessments of the Company’s risk management processes and system of internal control.
Under Section 303A.00 Provida is permitted to follow Chilean law in lieu of the relevant NYSE Corporate Governance Standard. Under Chilean law, our Directors’ Committee has assumed the functions of the former Audit Committee and it is not required to meet the additional requirements set out in Section 303A.07.
All members of Provida’s Directors’ Committee currently satisfy the “independence” requirement of members established in Rule 10A-3 of the Exchange Act.
Duties and responsibilities of the Directors’ Committee are established in the Chilean corporation law, including: the election of external auditors, the review of reports made by the external auditing firm, the approval of additional services rendered by the external auditing firm, the analysis made by Provida’s Audit, the review of Resolutions and Notes issued by regulatory organizations and the approval of transactions with related parties.
Provida’s Audit provides ongoing reports to management and the Directors’ Committee regarding risk management and internal control processes of Provida.
Under Section 303A.08, shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions thereto.
Under Section 303A.00 Provida is permitted to follow Chilean law in lieu of the relevant NYSE Corporate Governance Rule. Under Chilean law, Provida’s compensation policies do not provide for equity compensation of the same issuance. Thus, shareholder approval is not currently necessary. However, shareholders would not be entitled to vote if the Company were to choose to implement an equity compensation plan in the future.
NYSE Corporate Governance Standard applicable to domestic listed companies
Corporate governance standards applicable to Provida under Chilean law
Under Section 303A.09, listed companies must adopt and disclose corporate governance guidelines. Likewise, the board of directors should evaluate the performance of its functions and its committees at least once a year.
Under Section 303A.00 Provida is permitted to follow Chilean law in lieu of the relevant NYSE Corporate Governance Rule. The Company follows the rules regarding the disclosure of corporate governance guidelines established by Chilean Law. Chilean law does not require that boards of directors evaluate the performance of their functions.
Under Section 303A.10, listed companies must adopt and disclose a Code of Business Conduct and Ethics for directors and employees and promptly disclose any waivers of the code for directors or executive officers.
Under Section 303A.00 Provida is permitted to follow Chilean law in lieu of the relevant NYSE Corporate Governance Rule. The Company has a Code of Conduct which governs the Company’s business conduct and ethics for directors and employees. See “Item 16B. Code of Ethics.”
The above description of the differences between the NYSE Corporate Governance Standards and the corporate governance practices applicable to Provida under Chilean Law is available on the English version of our website at www.provida.cl.
The following chart sets out Provida’s organizational structure and the numbers of its employees for each major operational area as of December 31, 2013 which was 2,021 employees.
The daily operations of Provida are supervised by the Chief Executive Officer. The executives that report directly to the CEO are the Marketing and Sales Area Officer, the Investment Area Officer, the Operational and Systems Area Officer, the Risk Manager, the Chief Financial Officer, the Marketing Manager, the General Counsel, the Strategy and Business Development Manager and the Human Resources Manager.
The Audit Manager reports directly to the Board of Directors, through the Directors’Committee. Additionally, in certain issues related to performance of its duties (methodology, work programs, tools, among others), reports to the Corporate Internal Audit Department of MetLife, Inc. through the Head of Audit to South America, and for administrative purposes to the General Management. This ensures, together with the approval of the annual audit plan, the control of its performance by the Board of Directors (through the Directors’ Committee) and the supervision by the Corporate Internal Audit Department. This structure ensures the complete independence of the afomentioned function.
As of December 31, 2013, Provida had 2,021 employees, 885 of which were members of the sales force, representing 44% of Provida’s total staff. As of December 31, 2012, Provida had 1,740 employees, 717 of which were members of the sales force, representing 41% of Provida’s total staff. As of December 31, 2011, Provida had 1,350 employees, 429 of which were members of the sales force, representing 32% of Provida’s total staff.
Labor relationships
Provida’s employees are represented by two labor unions. El Sindicato Nacional de Trabajadores de AFP Provida (“Labor Union N° 1”) was established in 1986. Its membership represented 34.6% of the Company’s total employees as of December 31, 2013, of which 565 were sales agents and the rest corresponded to administrative staff. The second labor union, El Sindicato Nacional de Trabajadores Administrativos de AFP Provida (“Labor
Union N° 2”) was established in 1997 and its members are only administrative employees representing 19.8% of the Company’s total employees as of December 31, 2013.
In December 2013, a new collective bargaining agreement was executed between Provida and Labor Union Nº2, which resulted in a collective agreement that will be in effect until December 31, 2015. The collective bargaining with Labor Union N°1 was executed in January 2013 and the agreement is effective until January 31, 2015.
Provida is a publicly traded Chilean corporation with equity divided into 331,316,623 shares of common stock, in nominative registered form, with no par value and each share of common stock representing the right to one vote. Provida is controlled by its major shareholder Inversiones Previsionales S.A. (a wholly-owned subsidiary of MetLife Chile Acquisition Co. S.A. since October 1, 2013.), which owns 51.62% of issued shares in the Company but has no special voting rights.
The remaining subscribed and paid shares (other than those held indirectly by MetLife Chile Acquisition Co. S.A. through American Depositary Shares) are distributed between MetLife Chile Acquisition Co. S.A. (17.79%) and small local and foreign investors, including executives of Provida who each have an individual participation lower than 1% of the issued share capital. No major shareholder has special voting rights.
Corporation incorporated in Chile and whose major shareholder is MetLife Chile Acquisition Co. S.A. For more information, see “Item 4. Information on Provida—A. History and development—Recent developments.”
(2)
Depositary Bank of ADS, Banco Itaú acting as custodian. It includes a 21.97% owned by MetLife Chile Acquisition Co and the remaining 4.13% is owned by other third parties.
(3)
MetLife Chile Acquisition Co. S.A, purchased its shares through the tender offer of common shares of a single series conducted in September 2013. For further information, see “Item 4. Information on Provida—A. History and development—Recent developments”.
Article 89 of the Chilean Corporation Law requires that a Chilean company’s transactions with related parties be on a market basis or on similar terms to those usually prevailing in the market. Directors and executive officers who violate Article 89 are liable for losses to the Company resulting from such violation. In addition, Title XVI of the Chilean Corporation Law regulates the approval of transactions with related parties. Violations of such regulations may result in administrative or criminal penalties and personal liability to the Company, shareholders or third parties that may have suffered losses as a result of such violation. All of these transactions have been made in compliance with the requirements of Articles 89 and Title XVI of the Chilean
Corporation Law.
On October 1, 2013, AFP Provida S.A. was informed that its parent had changed and that MetLife Chile Acquisition Co. S.A. declared that its tender offer in Chile, for up to 100% of common shares of a single series, with no par value, fully subscribed and paid, was successful. As reported in the prospectus for the Offer in Chile, the ultimate controlling shareholder of Provida is MetLife, Inc. a New York Stock Exchange listed company duly incorporated in accordance with the laws of the State of Delaware, U.S.
Servicios de Administración Previsional S.A. is a company in which Provida has a 37.9% equity interest. PreviRed.com renders certain services to Provida, where the most important service is electronic collection of charges. The other services are referred to young workers subsidies, DNPA (declaration of non-payment) services, password administration, data processing and technological services and monitoring services.
On October 24, 2013, the Board of Directors of Servicio de Administración Previsional S.A. agreed to distribute a temporary dividend of MCh$2,875 equivalent to Ch$3,855.27 per share against profits of 2013, corresponding a total of MCh$1,089 for Provida.
Sociedad Administradora de Fondos de Cesantía Chile S.A. (“AFC”) Until October 7, 2013 when it ceased its operations, this was a subsidiary in which Provida had a 49.2% equity interest over the shares with economic rights. Provida is paid by AFC for rendering technological support and technological advisory services.
All the AFPs guaranteed AFC’s debt in the aggregate amount of UF 400,000, of which Provida had guaranteed MCh$4,544 (approximately MUS$9) in proportion to its equity interest in AFC, an amount required under certain of AFC’s credit agreements, specifically those in relation to guaranty bills and promissory notes. On February 4, 2010, the Administradora de Fondos de Cesantía reimbursed the Company with bank guarantee letters for an amount of UF 160,000 (MCh$3,730). Moreover, the guarantee of UF 240,000 (MCh$5,594) expired on April 25, 2013. However, on March 26, 2013, Sociedad Administradora de Fondos de Cesantía replaced it, establishing a new maturity date on January
31, 2014, and it did not consider shareholders as sureties, warrantors or joint co-signers.
The contract subscribed with Sociedad Administradora de Fondos de Cesantía S.A. ended on October 7, 2013, and from that date onwards, Sociedad Administradora de Fondos de Cesantía S.A. II began its operations and currently AFP Provida does not hold any equity interest in such entity.
MetLife Chile Seguros de Vida S.A. Provida entered into transactions with this company regarding collective health insurance policies to certain Provida’s employees.
As of October 1, 2013, because of the change in our ultimate parent, the following entities are no longer considered related companies and their effects on results are included only as of September 30, 2013.
BBVA Inversiones Chile S.A. The transactions entered into with this entity related to the licensing by BBVA Inversiones Chile S.A. of the software used in most operating and administrative processes (Unified Platform) and maintenance services, both corrective and developing, of the Unified Platform used in the Maintenance Center of BBVA Inversiones Chile S.A. The two parties also entered into a lease agreement of offices and self-service centers.
BBVA Corredores de Bolsa S.A. The transactions with this entity were financial services rendered to Provida.
BBVA Chile S.A. The transactions between Provida and this entity included lease agreements, collection services savings withdrawals and pension payments, overdraft lines, loans and bank current accounts.
BBVA Compañía de Seguros de Vida S.A. On January 1, 2005, BBVA Compañía de Seguros de Vida S. A. was awarded the bidding of Provida’s life and disability insurance until June 2009. This contract was amended in September 2010 regarding the applicable measurement period and finally closed in December 2013. See “Item 10. Additional Information—C. Material Contracts.” Currently, the definite balance sheet of this contract is under review, before its termination.
Aplica Tecnología Avanzada S.A. On December 29, 2004 a contract was entered into related to the data processing services of operational and administrative applications of the Company. Such service was rendered by CCR (Processing Center). This contract was transferred to the company Aplica Tecnologia Avanzada S.A., as a result of the merger between BBVA Bancomer and BBVA Bancomer Servicios S.A.
Banco Bilbao Vizcaya Argentaria S.A. On December 16, 2009 a contract was entered into related to services of data processing outsourcing, advisory and maintenance of terminals and help-desk.
BBVA Servicios Corporativos Ltda. On January 1, 2010 a contract was entered into for the externalization of Provida’s services. This contract could be terminated early provided that BBVA Group was no longer the controlling shareholder of AFP Provida, which occurred and terminated the contract in September 2013.
Aplica Soluciones Tecnológicas Chile Ltda. On January 4, 2010 a contract was entered into related to the design and development of software system.
Forum Servicios Financieros S.A. The transactions between Provida and this entity included agreement of office rentals.
For the fiscal years 2013, 2012 and 2011, details of the related party transactions were disclosed in Note 11 to the audited Consolidated Financial Statements.
During the fiscal year 2013, the Board of Directors, with the recommendation of the Directors’ Committee, approved the following transaction with related parties, which was entered into on similar terms and conditions to those prevailing in the market.
-
At the Ordinary Meeting held on September 25, 2013, the Board of Directors reviewed the contracts subscribed to with entities belonging to the BBVA Group, especially the Data Processing Contract with Aplica Tecnología Avanzada S.A. de C.V. (“ATA”). Certain modifications were adopted, which allowed AFP Provida to continue hiring the services regardless of the change of controlling shareholder, and facilitate the migration of services from the current supplier to the one which will be determined in the future.
Consolidated statements and other financial information
See “Item 3. Key information—A. Selected Financial Data” and “Item 18. Financial Statements” and other financial information filed with this annual report.
Dividends and dividend policy
At the Ordinary Shareholders’ meeting held on April 29, 2011, the Board of Directors announced its intention to pay a dividend for the fiscal year 2011 for an amount equivalent to 75% of Provida’s net profit, a proposal that was modified in the Ordinary Shareholders’ meeting held on April 27, 2012, when it was finally agreed to pay a dividend for the fiscal year 2011 for an amount equivalent to 100% of Provida’s net profit. At the same meeting, the Board of Directors announced its intention to pay a dividend for the fiscal year 2012 for an amount equivalent to 100% of Provida’s profit, a proposal that was approved in the Ordinary Shareholders’ meeting held on April 30, 2013. Finally, at the same meeting, the Board of Directors announced its intention to pay a dividend for the
fiscal year 2013 for an amount equal to at least 30% of Provida’s profits (dependent on the Company’s investment and financing needs after the distribution of dividends to be determined, as a result of the agreement for the sale of the shareholding held in AFP Provida), which will be submitted for vote in the Shareholders’ meeting to be held on April 30, 2014.
As agreed between our former controlling shareholder, Banco Bilbao Vizcaya Argentaria S.A. and BBVA Inversiones Chile S.A., and our new ultimate controlling shareholder, MetLife, Inc., in connection with the sale of the stake held in AFP Provida, at the Board of Directors’ Extraordinary meeting N° 50 held on May 2, 2013, it was agreed to summon an Extraordinary Shareholders’ meeting in order to distribute an extraordinary dividend N°59 amounting to Ch$248.51 per share out of retained earnings from previous years, which was finally approved by the
Extraordinary Shareholders’ meeting held on May 30, 2013, and which payment was made in the same date to those shareholders registered in the Register of Shareholders as of May 24, 2013.
Additionally, as agreed between our former controlling shareholder, Banco Bilbao Vizcaya Argentaria S.A. and BBVA Inversiones Chile S.A. and our new ultimate controlling shareholder, MetLife, Inc., in connection with the sale of the stake held in AFP Provida, at the Board of Directors’ Extraordinary meeting N° 51 held on August 5, 2013, it was agreed to summon an Extraordinary Shareholders’ meeting in order to distribute an extraordinary dividend N°60 amounting to Ch$82.92 per share out of retained earnings from previous years, which was finally approved by the Extraordinary Shareholders’ meeting held on August 27, 2013, and which payment was made on September 4, 2013 to those shareholders registered in the Register of Shareholders as of August
29, 2013.
Dividends per share for each period
2013(2)
2012
2011
Total dividend (Ch$)
126.50
314.00
238.00
Dividend ratio (1)
30%
100%
100%
(1)
Annual dividends for the corresponding annual net profit.
(2)
Dividend to be ratified and approved at the Ordinary Shareholders meeting scheduled for April 30, 2014. During 2013, two extraordinary dividends were distributed of Ch$248.51 and of Ch$82.92 in May and September, respectively.
See “Item 4. Information on Provida—A. History and development—Recent developments” for information on recent and pending transactions affecting Provida.
Provida estimates that during 2013, shares of its common stock were traded on nearly all trading days of the Santiago Stock Exchange. The table below shows, for the periods indicated, the quarterly high and low trading prices in pesos per share of common stock listed on the Santiago Stock Exchange, the quarterly high and low trading prices in dollars per ADS traded on the New York Stock Exchange and the high and low trading prices for the last five months in pesos per share of common stock and in dollars per ADS listed on the Santiago Stock Exchange and the New York Stock Exchange, respectively. See “Presentation of Information” for the exchange rates applicable during the periods set out below.
Source: Santiago Stock Exchange – Official Quotations Bulletin.
(1)
Pesos per share of common stock reflect the nominal closing price on the trade date.
(2)
Each ADS represents 15 shares of common stock.
As of April 25, 2014, the closing trading price for shares of Provida’s common stock listed on the Santiago Stock Exchange was Ch$3,400.00 per share or US$91.13 per ADS, with each ADS representing fifteen shares of the Company’s common stock, converted at the Observed Exchange Rate of Ch$559.67 = US$1.00 in the same date.
As of April 25, 2014, the closing trading price per ADS traded on the New York Stock Exchange was US$92.90 per ADS.
It is not possible for Provida to determine the proportion of ADS beneficially owned by U.S. residents.
The Chilean stock markets are sophisticated and developed, reflecting the particular economic history and development of Chile. The Government’s policy of privatization of state-owned companies, implemented during the 1980s, led to an expansion of privately-held shares, resulting in the increased importance of stock markets in Chile regulated by the SVS. Certain elements of Chile’s stock markets, including pension fund investors, are highly regulated with respect to investment and compensation criteria, even though Chile’s stock markets are generally less regulated than U.S. stock markets with respect to disclosure requirements and use of information.
History and description
The Santiago Stock Exchange was established in 1893 and is a private company whose equity consists of 48 shares held by 48 shareholders. As of December 31, 2013, 222 companies had shares listed on the Santiago Stock Exchange, which is the most significant exchange in Chile, accounting for 88.50% of all equity traded in Chile. Approximately 10.25% of equity trading is conducted on the Chilean Electronic Stock Exchange, an electronic trading market that was created by banks and brokerage houses, non-members of the Santiago Stock Exchange. The remaining 0.45% of equity is traded on the Valparaíso Stock Exchange.
Equities, investment fund shares, fixed-income securities, short-term and money-market securities, gold and US dollars are traded on the Santiago Stock Exchange. In 1991, the Santiago Stock Exchange introduced a forwards market for two instruments: US dollar futures and Selective Share Price Index (the “IPSA”) futures. In 1994 a stock options market was opened. Equities are traded through an electronic system called Telepregón that operates continuously from 9:30 to 16:30 (Chilean time). The Electronic Stock Exchange of Chile operates continuously from 9:30 to 16:30 (Chilean time) on each business day.
There are two share price indexes for the Santiago Stock Exchange: the General Share Price Index (“IGPA”) and the IPSA. The IGPA is calculated using the prices of shares for more than 180 issuers and is broken into five main sectors: banks and finance, farming and forest products, mining, industrial, and miscellaneous. The IPSA is an index for companies with the greatest market capitalization, which currently includes 40 major companies. Shares covered by the IPSA are weighted according to the value at which the shares traded, and they represent over 69.5% of the
entire market capitalization of the stocks traded on the Santiago Stock Exchange. Currently Provida’s shares of common stock are not included in the IPSA index.
The table below summarizes market capitalization, trading volumes and performance indicators for stocks traded on the Santiago Stock Exchange in the last 5 fiscal years:
(1) US dollar equivalents for the year-end stock market capitalization and trading volume figures are translated at the Observed Exchange Rate for the last day of such period.
The IPSA has increased at an annual real rate of 3.29% (with a standard deviation of 26.61%) for the period between December 31, 2009 and December 31, 2013. During 2013, the IPSA increased by 14.00% in real terms. As the table below shows, variations in the performance of listed stocks are often significant and reflect the high level of volatility characteristic of the Santiago Stock Exchange:
Real Annual % Change in
Year
IGPA Index
IPSA Index
2009
46.86
50.70
2010
38.17
37.60
2011
(12.39)
(15.22)
2012
4.67
2.97
2013
(13.49)
(14.00)
Source: The Santiago Stock Exchange.
Liquidity
As of December 31, 2013, 2012 and 2011, the market capitalization of equity securities listed on the Santiago Stock Exchange reached US$266.01 billion, US$313.46 billion and US$269.25 billion, respectively. The ten companies with the largest market capitalization on the Santiago Stock Exchange represented 45.7% in 2013, 43.2% in 2012 and 45.0% in 2011 of the IPSA index. The average monthly trading volumes for the years ended December 31, 2013, 2012 and 2011, were MUS$3,831, MUS$3,881 and MUS$4,777 respectively.
Foreign ownership
Foreign investment in Chile is governed by Decree Law N° 600 and by the Central Bank Act. Capital and earnings can be remitted through the formal exchange market. Ownership of Chilean shares by foreign investors through an ADS program is regulated by the Central Bank Act and by Chapter XXVI of the Central Bank Act, which does not require a withholding period before remitting capital or earnings abroad. Even though Chapter XXVI was repealed in April 2001, it is still applicable to foreign investment contracts executed before that date (See “Item 10. Additional Information— D. Exchange controls”).
Foreign capital investment funds (“FCIF”) are regulated by Law N° 18,657, and receive preferential tax treatment. FCIFs are required to obtain a favorable report issued by the SVS, in case capital may not be remitted within five years from the date the investment is made, although earnings may be remitted at any time. A FCIF may hold a maximum of 5% of shares in a specific company, although this might be increased if the company issues new shares. Furthermore, no more than 10% of a FCIF’s assets may be invested in one company’s stock, and no more
than 25% of the current outstanding shares of any listed company may be owned on a cumulative basis by one FCIF.
Market information
Since November 16, 1994, Provida’s ADS have been listed on the New York Stock Exchange under the symbol “PVD”. Until August 25, 1999, each ADS represented one share of Provida’s common stock, while after the increase in Provida’s issued share capital each ADS came to represent fifteen shares of common stock. Until February 7, 1996, the ADS were deposited with The Chase Manhattan Bank N.A. which acted as depositary. After that date, Provida’s ADS have been deposited with The Bank of New York Mellon as the successor depositary (the “Depositary”).
During the fiscal year 2013, a total of 137,097,936 shares of Provida’s common stock were jointly traded in Chilean Stock markets (the Santiago Stock Exchange, the Valparaíso Stock Exchange and the Electronic Stock Exchange) and the New York Stock Exchange, amounting to 41.4% of the Company’s shares of common stock.
In 2013, the value of trades of Provida’s stock listed on the Chilean stock market was MCh$218,910 (approximately MUS$482), higher by 26.9% with respect to the figure recorded for the previous year, and the value of trades of Provida’s stock listed on the New York Stock Exchange was MUS$418, higher by 76.1% with respect to the figure for 2012. In total, trades had a value of MCh$437,992 (MUS$835), equivalent to 418.1% of the Company’s paid-in capital.
The breakdown by each stock exchange for the fiscal year 2013 is as follows:
-
A total of 57,217,760 shares of Provida’s common stock were traded on the Santiago Stock Exchange for a total value of MCh$179,479. The average price was Ch$3,137 per share.
-
A total of 12,338,712 shares of Provida’s common stock were traded on the Electronic Stock Exchange for a total of MCh$39,031.
-
A total of 124,129 shares of Provida’s common stock were traded on the Valparaíso Stock Exchange for a total of MCh$401.
-
A total of 4,494,489 ADS (1 ADS representing 15 shares of Provida’s common stock) were traded on the New York Stock Exchange for a total of MUS$418.
Provida is a corporation organized under the Chilean Corporation Law and under the Decree Law 3,500. Shareholder rights in Chilean corporations are governed by the applicable provisions of the Chilean Corporations Act (“Ley de Sociedades Anónimas 18,046”) and such provisions are consistent with or do not conflict those established in the Decree Law 3,500 and the company’s by-laws. These effectively serve the purpose of both the articles of association or certificate of incorporation and the by-laws
of a company incorporated in the United States. The Company’s deed of incorporation was executed on March 3, 1981 and was registered in the Registry of Commerce of Santiago on April 6, 1981, on number 6,060, number 3,268. The last modification to the Company’s by-laws was approved at the Extraordinary Shareholders’ meeting held on April 30, 2009, in which they agreed to modify the composition of the Board of Directors in order to establish that the Company will be administered by a Board of Directors composed of 7 Directors and 2 Alternate Directors. The
Company’s current by-laws have been filed as Exhibit 1.1 to the annual report on Form 20-F for the fiscal year ended December 31, 2013.
Purpose
Article 4 of the Company’s amended and restated by-laws establishes its corporate purpose as follows: “the Company’s exclusive purpose is to (i) manage pension funds established by law; (ii) provide and administer the benefits established in the Decree Law 3,500 passed in 1980 and its amendments and those specifically authorized by other present or future legal enactments; (iii) constitute and/or participate, as a complement to its line of business, in related companies pursuant to Article 23 and 23 bis of said Decree Law 3,500; (iv) carry out activities authorized by law constituting and/or participating in related companies or united corporations authorized by law and/or
as agreed to by the Superintendency of Pension Fund Administrator and (v) constitute and/or participate in corporations constituted as securities custodian companies under Law 18,876.
Board of Directors
Provida is administered by a Board of Directors composed of 7 Directors and 2 Alternate Directors. One Alternate Director position is currently vacant. Out of the 7 Directors, two of them shall be considered as autonomous in accordance with Decree Law 3,500. These two Directors considered as autonomous, must have an Alternate Director that is able to replace the respective Director considered as Autonomous and comply with the same requirements. Directors hold their position for a term of two years, after which time elections are held, where the members can be reelected. The Board of Directors holds ordinary meetings once a month. The quorum to hold meetings requires the presence of a majority of its members, and all resolutions require majority approval of those present and voting. In addition:
(a)
there are no restrictions in the Company’s by-laws relating to the right of Directors and Officers to vote on a proposal in which there is or might be a conflict of interest. However, under Chilean law, the Board of Directors must decide in advance whether a transaction is intended to contribute to the equity interest, and whether it is more suitable in price, terms and conditions than those transactions prevailing in the market, and whether it is in compliance with the rest of requirements determined by the Chilean Corporation Law. Directors, managers, administrators, main executives or liquidators holding equity interests or taking part in negotiations intended to complete an operation with related parties, shall inform the Board of Directors about that and shall
be excluded from voting on the Board’s decisions related to such transaction;
(b)
the aggregate compensation of the Board of Directors is fixed at an Ordinary Shareholders’ meeting;
(c)
there are no restrictions in the Company’s by-laws relating to the borrowing powers of Directors;
(d)
there are no restrictions in the Company’s by-laws setting out age limits or retirement requirements for Directors and Officers; and
The Company’s share capital is divided into 331,316,623 ordinary shares of common stock, in registered form, of the same series, with no par value. Each ordinary share entitles the holder thereof to one vote and to participate in any distributions by the Company in proportion to the number of shares that they own. Shareholders have pre-emptive rights to subscribe for new shares that may be issued by the Company from time to time in proportion to the shares they hold at the time of the increase of capital. In addition:
(a)
there are no restrictions in the by-laws setting out a time limit for dividend entitlements to lapse. All shares are entitled to equal dividend payments. However, in accordance with the rule currently in force, if five years pass since a dividend was declared and it remains unpaid, the dividend will go to the Chilean Fire Department;
(b)
there are no restrictions in the by-laws concerning staggered intervals for the re-election of Directors or any articles permitting or requiring cumulative voting;
(c)
all shareholders have the right to participate in the Company’s net profit. According to its by-laws, the Company is required to distribute an annual cash dividend to all shareholders in proportion to the shares held for a value of at least thirty-percent of that fiscal year’s net profit;
(d)
in the case of a liquidation (which would be carried out by the Superintendency of Pensions) those pension funds managed by the Company would also be liquidated. As required by law, all shareholders have the same right to participate in any surplus in the case of the Company’s liquidation after having settled all its pending debts;
there is no right to a sinking fund under the by-laws;
(g)
all the Company’s shares are issued and fully paid. Consequently, shareholders are not subject to further capital requirements;
(h)
there are no restrictions in the Company’s by-laws discriminating against any existing or prospective shareholder as a result of such shareholder owning a substantial number of shares in the Company;
(i)
the by-laws do not describe any limitation on the rights to own shares in the Company;
(j)
there are no articles in the by-laws governing the ownership threshold above which a shareholder must disclose his/her holdings. Nevertheless, as required by law, if as a consequence of any acquisition, a person or group of persons with agreement in acting has or exceeds two thirds of the voting of the Company, they shall be forced to make a public offer for the rest of the outstanding shares, within a period and in a way established by the Chilean stock market Law; and
(k)
there are no restrictions in the by-laws imposing more stringent conditions than those required by law to change the capital of the Company.
In order to modify shareholders’ rights, the by-laws must be amended to reflect such modification. To amend the Company’s by-laws, the pertinent modification must be proposed and approved at the Extraordinary Shareholder’s meeting and subsequently, the Superintendency of Pension shall authorize such amendment by a resolution that must be published in the Official Gazette, as well as in the Register of Business Enterprises.
According to the by-laws, shareholders’ meetings can be ordinary or extraordinary. An ordinary shareholders’ meeting must take place within four months from the close of the relevant fiscal year. Any other shareholders’ meeting is an extraordinary shareholders’ meeting. Generally, the Board of Directors calls shareholders’ meetings; however, these can be called by the Superintendency of Pensions, other institutions authorized by law or by shareholders representing at least 10% of the issued and fully paid share capital. Notice of the meeting must be published in a newspaper of general circulation, in the domicile of the Company three times during three different days.
During 2013 and 2012, Provida did not enter into any material contracts, other than in the ordinary course of business.
In 2013, Provida terminated the following contracts:
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Contract subscribed with BBVA Servicios Corporativos Ltda. in 2010 referred to the externalization of services. This contract included the transfer of Provida's workers who rendered services; the sale of the necessary tangible assets associated to tasks rendered by such workers necessary to carry out these services; the cessation of contracts with providers, the cessation of certain rental agreements; the real estate and room rentals necessary to its functioning and the subscription of outsourcing service contracts. The contract
had a duration of 10 years renewable for periods of 10 years. The annual price was UF 260,530 (MCh$6,073) for the year 2010, which increased in accordance with volume annually at a rate of 3.38%. In the Ordinary Meeting held on February 23, 2011, the Board of Directors approved a reduction of UF 36,110 per year in the service fee paid to BBVA Servicios for the year 2011, with an annual price of UF 233,225.91 (MCh$5,436).
At the Extraordinary meeting held on August 31, 2012, Provida’s Board of Directors approved an amendment by which BBVA Servicios - Continuadora reduced the services rendered by BBVA Servicios to Provida, thus the annual cost of services decreased to UF41,932,01 (MCh$977) and the contract was no longer considered material to Provida.
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Insurance agreement subscribed with BBVA Seguros de Vida S.A. on December 22, 2004, effective from January 1, 2005 until June 30, pursuant to which Provida took out insurance for its life and disability payment obligations in excess of a certain casualty rate level, as negotiated with BBVA Seguros de Vida S.A. Under this agreement, Provida paid all casualties up to the maximum rate specified therein. This insurance agreement was modified by mutual consent of the parties effective as of January 2008 in order to update the mortality tables used to calculate benefits, which increased the cost of the insurance. In July 2009, the conditions under which the contract operated were modified by mutual consent, taking into consideration that the life and
disability insurance constituted a mismatch risk between the assets and liabilities arising from such obligation and a change instructed by Superintendency of Securities and Insurance that allowed the maintenance of a technical reserve valued according to the conditions prevailing in the market. The above intended to modify the calculation of the monthly financial revenues by defining a benchmark to invest assets and establishing that the difference in the return between the defined benchmark and the asset portfolio would be 90% to Provida and 10% to the insurer when the difference was positive and 10% to Provida and 90% to the insurer when the difference was negative. Likewise, it was established that reviews should be made monthly.
During September 2010, BBVA Seguros de Vida S.A. requested a revision of its contract with AFP Provida S.A., since there were interpretative differences regarding the review periods, pointing out that the insurer’s idea was to establish reviews over accrued periods through partial settlements made monthly. After considering arguments and making a revision, it was concluded that under the management framework of the insurance contract, it was logical to establish a procedure of accrued reviews with partial settlements that was effective until the last month of the enforcement of the contract. The above implied a new modification of contract
in December 2010.
-
Non-exclusive worldwide software licensing contract and software maintenance contract with BBVA Inversiones Chile S.A subscribed on December 1, 2005, with an amendment in January 2009. Pursuant to such contracts, Provida licensed from BBVA Inversiones Chile S.A. the intellectual property rights relating to software use, its application on different operating and administrative processes which is the software used in most operating and administrative processes (Unified Platform). Finally, Provida paid BBVA Inversiones Chile S.A. amounts of MCh$0 in 2013, MCh$2,832 in 2012 and MCh$2,832
in 2011 in connection with the software license. The license software contract had an unlimited term and could be terminated by either party by giving twelve months prior notice or if Provida ceases to be part of the BBVA Group.
The Central Bank is responsible for, among other things, monetary policy and exchange controls in Chile. Appropriate registration of a foreign investment in Chile grants the investor access to the formal exchange market.
Foreign investments can be registered with the Foreign Investment Committee under Decree Law N° 600 or can be registered with the Central Bank under the Central Bank Act. The latter is an organic constitutional law requiring a “special majority” vote of the Chilean Congress to be modified.
The Foreign Investment Contract (the “Contract”) among the Central Bank, Provida and the Depositary pursuant to the Central Bank Act – Article 47 – and Chapter XXVI – Compendium of Foreign Exchange Regulations – of the Central Bank, addressed the issue of ADS by a Chilean company. On April 16, 2001, the Central Bank approved a series of amendments to the Compendium of Foreign Exchange Regulations, thereby establishing an entirely new regime. The new Compendium represents the culmination of a deregulation process, which has resulted in the elimination of many of the exchange restrictions established by the former Compendium. Chapter XXVI has been repealed. Notwithstanding, the applicable law
that governs the Contract is in force at the execution of the Contract. Therefore, for the purposes of the Contract, Chapter XXVI is still applicable.
Absent the Contract, under applicable Chilean exchange controls regulations, investors might not be granted access to the formal exchange market for the purpose of converting pesos to dollars and repatriating from Chile the amounts received with respect to deposited shares or shares withdrawn from deposit on surrender of ADS (including amounts received as cash dividends and proceeds from the sale in Chile of the underlying shares and any rights arising therefrom). The following is a summary of certain restrictions contained in the Contract. This summary does not purport to be complete, and is qualified in its entirety by reference to Chapter XXVI, prior to the amendment by the Central Bank on April
16, 2001 and the Contract.
Under Chapter XXVI and the Contract, the Central Bank agreed to grant to the Depositary, on behalf of ADS holders, and to any investor not residing or domiciled in Chile who withdraws shares upon delivery of ADS (such shares being referred to herein as “Withdrawn Shares”), access to the formal exchange market to convert pesos to dollars (and remit such dollars outside Chile) in respect of shares represented by ADS or Withdrawn Shares. This includes amounts received as (a) cash dividends, (b) proceeds from the sale in Chile of Withdrawn Shares subject to receipt by the Central Bank of a certificate from the holder of the Withdrawn Shares (or from an institution authorized by the Central Bank) that such holder’s residence and domicile are outside Chile and a certificate from a Chilean stock exchange (or from a brokerage or securities
firm established in Chile) that indicates that such Withdrawn Shares were sold on a Chilean stock exchange, (c) proceeds from the sale in Chile of rights to subscribe for additional shares, (d) proceeds from the liquidation, merger or consolidation of a company and (e) other distributions, including without limitation those resulting from any re-capitalization, as a result of holding shares represented by ADS or Withdrawn Shares. Transferees of Withdrawn Shares were not entitled to any of the foregoing rights under Chapter XXVI unless the Withdrawn Shares were re-deposited with the Depositary. Under certain circumstances, investors receiving Withdrawn Shares in exchange for ADS had the right to re-deposit such shares.
Chapter XXVI provided access to the formal exchange market in relation to dividend payments provided the company certify to the Central Bank that such dividend payment has been made and any applicable tax has been withheld. Chapter XXVI also provided access to the formal exchange market in relation to the sale of Withdrawn Shares or distributions in relation to such shares. This is conditional upon receipt by the Central Bank of certification from the Depositary that such shares were withdrawn in exchange for ADS and the receipt under a waiver benefit of the Foreign Investment Contract until such Withdrawn Shares were re-deposited.
Chapter XXVI and the Contract provided that a person who brought foreign currency into Chile to purchase shares with the benefit of the Contract had to convert it into pesos on the same date and that person had 5 days within which to invest in shares in order to receive the benefits of the Contract. If such person decided during that period not to acquire shares, the person could access the formal exchange market to re-acquire dollars, provided that the applicable request was presented to the Central Bank within 7 days of the initial conversion into pesos. Shares acquired as described above could be deposited for ADS and the benefits of the Contract
received, subject to receipt by the Central Bank of a certificate from the Depositary that such deposit occurred and that the related ADS were issued, as well as receipt by the custodian of a declaration from the person making such deposit waiving the benefits of the Contract with respect to the deposited shares. Both periods mentioned above were modified by the Central Bank on September 20, 1995. Formerly, the period was 60 days for converting dollars into pesos and 90 days from the initial conversion for informing the Central Bank that the person had not acquired shares of common stock and had reacquired dollars.
Access to the formal exchange market under any of the circumstances described above is not automatic. Pursuant to Chapter XXVI, such access requires the approval of the Central Bank based on a request presented through a banking institution established in Chile. The Contract states that if the Central Bank does not act on such request within seven banking days, the request can be deemed approved.
Under current Chilean law, the Contract cannot be unilaterally modified by the Central Bank. However, no assurance can be given that additional Chilean restrictions applicable to ADS holders on disposals of the underlying shares or the repatriation of the proceeds from such disposals could not be imposed in the future, nor can there be any assessment as to the duration or impact such restrictions could have if they were introduced.
Taxation of dividends. In accordance with Decree Law 824 of 1974 on tax income, as amended, foreign investors domiciled and tax residents abroad are subject to a tax on the gross amount of dividends paid to them, which is generally imposed at a rate of 35% and withheld and paid by the disbursement officer on behalf of the investor (the “Withholding Tax”). Because this tax is a withholding tax, it is not necessary for a foreign investor to submit an income tax statement.
On the other hand, taxpayers of additional taxes will be granted a credit, which will be equivalent to the amount paid as first category tax, affecting gains distributed(1). The First Category Tax credit, if available, does not reduce the Withholding Tax on a one for one basis because it increases the base on which the Withholding Tax is imposed. In addition, if the Company distributes less than all of its distributable income, the credit for First Category Tax paid by the Company is reduced proportionately. The amount of the credit will depend on the year in which profits had been generated and the tax rates imposed on such profits. Currently, the rate of the First Category Tax is 20% in conformity with the Law N°20,630(2)
of September 2012 which fixed the tax rate affecting companies domiciled in Chile.
The example below illustrates the effective Chilean Withholding Tax burden on a cash dividend received by a foreign holder, assuming a Withholding Tax rate of 35%, an effective First Category Tax at the maximum rate of 20.0%, and a distribution of 100% of the Company’s net profit that is distributable after payment of the First Category Tax.
Example: Considering the distribution of profits with a tax of 20% in Ch$
Increase by amount of Credit for First Category Tax
20
Withholding Tax (35% of the Company’s net distributable profit plus increase by amount of credit for First Category Tax)
(35)
Credit for First Category Tax
20
Net Withholding Tax
(15)
Net dividend received
65 (80 - 15)
Effective dividend Withholding Tax rate
18.75% (15/80)
The foregoing tax consequences apply to cash dividends paid by the Company to the Depositary as representative of the holders of ADS. Disbursements of such cash dividends by the Depositary to the holders of ADS will not be subject to Chilean taxation. Dividend distributions made in property (other than shares) will be subject to the same Chilean tax rules as cash dividends based on the fair market value of such property. Stock dividends are not subject to Chilean taxation.
(1)
Certain taxes paid by the Company (the “First Category Taxes”) with respect to the profits from which the dividends are paid are credited against Withholding Taxes at the time of the withholding.
(2)
The Law 20,630 published in the Official Gazette on September 27, 2012, introduces a number of modifications to the Decree Law 824 of 1974, “Income Tax Law”, Decree Law 825 of 1974, “Value Added Tax”, and Decree Law 3,475, “Stamp and Seal Tax”, among others.
Currently there is no income tax treaty between Chile and the United States. A proposed income tax treaty from 2010 is not yet in effect, and there can be no assurance as to whether or when it will enter into force.
Capital gains. Gains from the sale or exchange of ADS (or ADRs evidencing ADS) outside of Chile are not subject to Chilean taxation; however, Law 20,630 of September 2012 introduced amendments to Article 10 of the Income Tax Law regarding the territorial tax regulation that changed the rules regarding qualification of income as stemming from a Chilean source. An ADR holder should consider whether this legal amendment affects it.
For non-Chilean companies, unless an exemption applies (as described below), gains recognized on a sale or exchange of shares (as distinguished from sales or exchanges of ADS representing such shares) will be subject to a capital gains tax (at a rate of 20.0% for 2013), and an additional tax at a rate of 35% (the former being creditable against the latter) if: (i) the foreign holder has held the shares for less than one year since exchanging ADS for the shares, (ii) the foreign holder acquired and disposed of the shares in the ordinary course of its business or as a regular trader of shares or (iii) the foreign holder transferred shares of common stock to a related person, as defined in the Chilean tax law. For non-Chilean individuals, gains on the disposition of shares will be subject only to the capital gains tax, (at the rate described above), unless an exemption applies (as described below).
The tax basis of shares received in exchange for ADS is the acquisition value of the shares. The valuation procedure set forth in the Deposit Agreement establishes the value of shares received at the highest price at which they were traded on the Santiago Stock Exchange on the date of the exchange (the “Stock Exchange Price”). Consequently, the conversion of ADS into shares and the immediate sale of such shares for the value established under the Deposit Agreement would not generate a capital gain; therefore, the conversion and immediate sale would not be subject to taxation in Chile. It is possible to exchange ADS for shares, but, under Chilean law, it is not possible to exchange shares for ADS.
Moreover, the sale of such shares for a value greater than their Stock Exchange Price, in accordance with amendments incorporated by the Law 20,448(3) of the year 2010, would be subject to tax in Chile, unless the seller complies with certain requirements of Chilean law regarding the Article 107 exemption in conformity with the Chilean income tax law, and the shares have been acquired in a Chilean Stock Exchange expressly authorized by the Securities and Insurance Superintendency. If the seller does not comply with such requirements, the excess of the sale proceeds over the shares’ Stock Exchange Price would be subject to additional taxes at a rate of 35%.
The exercise of preemptive rights relating to the shares is not subject to Chilean taxation. Any gain on the sale or assignment of preemptive rights relating to the shares is subject to both the 20% capital gains tax and the 35% Withholding Tax (the former being creditable against the latter).
Foreign holders are urged to consult their tax advisers to determine whether a sale or exchange of their shares would be subject to tax in Chile, the amount of any such tax and how it would be withheld, and whether an exemption to such tax would apply.
Other Chilean taxes. No Chilean inheritance, gift or succession taxes apply to the transfer or disposition of ADS by a foreign holder, but such taxes generally do apply to the transfer or disposition of shares by a foreign holder by bequest, devise or gift. No Chilean stamp, issue, registration or similar taxes or duties apply to foreign holders of ADS or shares.
(3)
The law 20,448 of 2010 derogated from the article 18ter and incorporated the current article 107 of the income tax law; however, the new text of the article 107 of the income tax law states that, in order to exempt from taxes the greater value from a sale of shares or capital gains, shares should be acquired in a stock exchange in a country authorized by the Superintendency of Securities and Insurance. In other words, in order to use the exemption, ADRs are required to be acquired in a stock exchange authorized by the Superintendency of Securities and Insurance, unless the Internal Revenue Service of Chile applies a different interpretation in the future.
The following is a discussion of material U.S. federal income tax consequences to a U.S. Holder (as defined below) of owning and disposing of shares or ADS, but it does not purport to be a comprehensive description of all tax considerations that may be relevant to a particular person’s decision to hold such securities. The discussion applies only to a U.S. Holder that holds shares or ADS as capital assets for U.S. federal income tax purposes and it does not describe all of the tax consequences that may be relevant to holders subject to special rules, such as:
-
Certain financial institutions
-
Dealers or traders in securities who use a mark-to-market method of tax accounting
-
Persons holding shares or ADS as part of a hedging transaction, straddle, wash sale, conversion transaction or integrated transaction , or persons entering into a constructive sale with respect to the ADS or shares
-
Persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar
-
Entities classified as partnerships for U.S. federal income tax purposes
-
Persons liable for the alternative minimum tax
-
Persons liable for tax under the provisions of the Internal Revenue Code of 1986, as amended (the “Code”) known as the Medicare contribution tax
-
Tax-exempt entities, including “individual retirement accounts” or “Roth IRAs”
-
Persons that own or are deemed to own ten percent or more of our voting stock
-
Persons who acquired our ADS or shares pursuant to the exercise of any employee stock option or otherwise as compensation
-
Persons holding shares or ADS in connection with a trade or business conducted outside of the United States.
If an entity that is classified as a partnership for U.S. federal income tax purposes holds shares or ADS, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and upon the activities of the partnership. Partnerships holding shares or ADS and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of holding and disposing of the shares or ADS.
This discussion is based on the Code, administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the date hereof. These laws are subject to change, possibly with retroactive effect. It is also based in part on representations of the Depositary and assumes that each obligation under the Deposit Agreement and any related agreement will be performed in accordance with its terms.
A “U.S. Holder” is a holder who, for U.S. federal income tax purposes, is a beneficial owner of shares or ADS and is:
-
a citizen or individual or resident of the United States;
-
a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state thereof or the District of Columbia; or
-
an estate or trust, the income of which is subject to U.S. federal income taxation regardless of its source.
In general, a U.S. Holder who owns ADS will be treated as the owner of the underlying shares represented by those ADS for U.S. federal income tax purposes. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges ADS for the underlying shares represented by those ADS.
The U.S. Treasury has expressed concerns that parties to whom American depositary shares are pre-released or intermediaries in the chain of ownership between United States holders and the issuer of the security underlying the American depositary shares may be taking actions that are inconsistent with the claiming of foreign tax credits by United States holders of American depositary shares. Such actions would also be inconsistent with the claiming of the preferential rates of tax, described below, applicable to dividends received by certain non-corporate holders. Accordingly, the analysis of the creditability of Chilean taxes and the availability of the preferential rates of tax applicable to dividends received by certain non-corporate holders, each described below, could be affected by actions taken by such parties or intermediaries.
U.S. Holders should consult their tax advisers concerning the U.S. federal, state, local and foreign tax consequences of owning and disposing of shares or ADS in their particular circumstances.
Subject to the passive foreign investment company rules described below, distributions paid on ADS or shares, other than certain pro rata distributions of shares, will be treated as dividends to the extent they are paid out of the Company’s current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Because the Company does not maintain calculations of its earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported to U.S. Holders as dividends. Subject to applicable limitations and the discussion above regarding concerns expressed by the U.S. Treasury, dividends paid by “qualified foreign corporations” to certain non-corporate U.S. Holders may
be taxable as “qualified dividend income” and therefore may be taxable at the preferential rates applicable to long-term capital gain. A foreign corporation is treated as a qualified foreign corporation with respect to dividends paid on stock that is readily tradable on an established securities market in the United States, such as the New York Stock Exchange where our ADS are traded. U.S. Holders should consult their tax advisers regarding the availability of these preferential tax rates on dividends in their particular circumstances. The amount of a dividend will include any amounts withheld by the Company in respect of Chilean taxes (taking into account the credit for First Category Taxes, as described in “—Chilean Tax Considerations—Taxation of dividends”). The amount of the dividend will generally be treated as foreign-source dividend income to U.S. Holders and will
not be eligible for the dividends-received deduction generally allowed to U.S. corporations under the Code. Dividends will be included in a U.S. Holder’s income on the date of the U.S. Holder’s or, in the case of ADS, the Depositary’s receipt of the dividend. The amount of any dividend income paid in Chilean pesos will be a U.S. dollar amount calculated by reference to the exchange rate in effect on the date of such receipt regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. A U.S. Holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of its receipt.
Subject to applicable limitations that may vary depending upon the U.S. Holder’s circumstances and subject to the discussion above regarding concerns expressed by the U.S. Treasury, Chilean income taxes withheld from dividends on shares (after reduction for the credit for First Category Tax) generally will be creditable against the U.S. Holder’s U.S. federal income tax liability. The rules governing foreign tax credits are complex, and U.S. Holders should consult their tax advisers regarding the availability of foreign tax credits in their particular circumstances. Instead of claiming a foreign tax credit, a U.S. Holder may, at its election, deduct such Chilean taxes in computing its taxable income, subject to generally applicable limitations under U.S. law.
An election to deduct foreign taxes instead of claiming foreign tax credits applies to all taxes paid or accrued in the taxable year to foreign countries and possessions of the United States.
Sale or other disposition of shares or ADS
Subject to the passive foreign investment company rules described below, for U.S. federal income tax purposes, gain or loss realized on the sale or other disposition of shares or ADS will be capital gain or loss, and will be long-term capital gain or loss if the U.S. Holder held the shares or ADS for more than one year. The amount of gain or loss will be equal to the difference between the U.S. Holder’s tax basis in the shares or ADS disposed of and the amount realized on the disposition, in each case as determined in U.S. dollars. Because such gain or loss will generally be U.S.-source gain or loss for foreign tax credit purposes, the creditability of any Chilean taxes imposed on gain from shares or ADS may be significantly limited. See “—Chilean tax considerations—Capital gains.” U.S. Holders should consult their tax advisors regarding the creditability of such Chilean taxes.
Passive Foreign Investment Company Rules
In general, a non-U.S. corporation will be considered a “passive foreign investment company” (“PFIC”) for U.S. federal income tax purposes for any taxable year in which: (i) 75% or more of its gross income consists of passive income or (ii) 50% or more of the average quarterly value of its assets consists of assets that produce, or are held for the production of, passive income. For purposes of the above calculations, a non-U.S. corporation that directly or indirectly owns at least 25% by value of the shares of another corporation is treated as if it held its proportionate share of the assets of such other corporation and received directly its proportionate share of the income of such other corporation. Passive income generally includes dividends, interest, rents, royalties and capital gains.
The Company does not believe that it should be treated as a “PFIC” for U.S. federal income tax purposes for its 2013 taxable year. However, because PFIC status depends upon the composition of a company’s income and assets and the market value of its assets from time to time, which may be determined in large part by reference to the market value of a company’s stock, and because of uncertainties in the manner of application of the PFIC rules, including uncertainties as to the valuation and proper characterization of certain of the Company’s assets as passive or active (in particular, uncertainty as to the characterization of certain reserves denominated as mandatory investments), there can be no assurance that the
Company will not be considered a PFIC for any taxable year. U.S. Holders should consult their own tax advisers to determine whether the Company was a PFIC for its 2013 taxable year and what the U.S. federal income tax consequences of an investment in a PFIC are to them.
If the Company were a PFIC for any taxable year during which a U.S. Holder held shares or ADS, such holder would be subject to special rules generally intended to eliminate any benefits from the deferral of U.S. federal income tax that a U.S. Holder could derive from investing in a foreign corporation that does not distribute all of its earnings on a current basis. Unless a U.S. Holder has made the mark-to-market election described below, upon a disposition of shares or ADS, including, under certain circumstances, a pledge or a disposition pursuant to an otherwise tax-free reorganization, gain recognized by a U.S. Holder would be allocated ratably over the holder’s holding period for the shares or ADS. The amounts allocated to the taxable year of the disposition and to years before the
company became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate on ordinary income in effect for individuals or corporations, as appropriate, for such taxable year, and an interest charge will be imposed on the resulting tax liability for each such taxable year. Similar rules would apply to any distribution in respect of shares or ADS to the extent it exceeds 125% of the average of the annual distributions on shares or ADS received by a U.S. Holder during the preceding three years or such holder’s holding period, whichever is shorter. If the Company were a PFIC, a U.S. Holder would also be subject to these adverse U.S. federal income tax rules on indirect or constructive distributions on, or dispositions of, shares of any subsidiary of the
Company that is a PFIC. If the Company were a PFIC for any year during which a U.S. Holder holds shares or ADS, it would generally continue to be treated as a PFIC with respect to such holder for all succeeding years during which the U.S. Holder holds shares or ADS even if the Company ceased to meet the threshold requirements for PFIC status.
Alternatively, if the shares or ADS are “regularly traded” on a “qualified exchange,” a U.S. Holder may make a mark-to-market election that would result in tax treatment different from the general tax treatment for PFICs described above. The shares or ADS will be treated as “regularly traded” in any calendar year in which more than a minimum quantity of the shares or ADS, as the case may be, are traded on a qualified exchange on at least 15 days during each calendar quarter. A “qualified exchange” includes a foreign exchange that is regulated by a governmental authority in which the exchange is located and with respect to which certain other requirements are met. The New York Stock Exchange, on which our ADS are listed, is a qualified exchange for U.S. federal income tax purposes. Consequently, if the ADS are regularly traded on the New York Stock Exchange, the mark-to-market election would be available
to a U.S. Holder of ADS if the Company is or becomes a PFIC.
If the mark-to-market election is available and a U.S. Holder makes a mark-to-market election, such holder generally will recognize as ordinary income the excess, if any, of the fair market value of the shares or ADS at the end of each taxable year over their adjusted tax basis, and will recognize an ordinary loss in respect of the excess, if any, of the adjusted tax basis of the shares or ADS over their fair market value at the end of the taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). If a U.S. Holder makes the election, such holder’s basis in the shares or ADS will be adjusted to reflect any such income or loss amounts. Any gain recognized on the sale or other disposition of such shares or ADS in a year when the Company is a PFIC will be treated as ordinary
income and any loss will be treated as an ordinary loss (but only to the extent of the net amount of previously included income as a result of the mark-to-market election).
A timely election to treat the Company as a qualified electing fund under Section 1295 of the Code would result in alternative treatment. U.S. Holders should be aware, however, that the Company does not intend to satisfy record keeping and other requirements that would permit U.S. Holders to make qualified electing fund elections if the Company were a PFIC.
If a U.S. Holder owns shares or ADS during any year in which the Company is a PFIC, such holder generally must file an Internal Revenue Service Form 8621 with respect to the Company, generally with the holder’s annual U.S. federal income tax return, subject to certain exceptions.
If the Company were a PFIC or, with respect to a particular U.S. Holder, were treated as a PFIC for the taxable year in which it paid a dividend or for the prior taxable year, the preferential rates discussed above with respect to dividends paid to certain non-corporate U.S. Holders would not apply.
Information reporting and backup withholding
Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting, and may be subject to backup withholding unless (i) the U.S. Holder is an exempt recipient or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding.
The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the holder’s U.S. federal income tax liability and may entitle the U.S. Holder to a refund, provided that the required information is timely furnished to the Internal Revenue Service.
INVESTORS SHOULD CONSULT THEIR TAX ADVISERS ABOUT THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE OWNERSHIP AND DISPOSITION OF ADS OR SHARES.
We are subject to the information requirements of the Exchange Act, except that as a foreign issuer, we are not subject to the proxy rules or the short-swing profit and disclosure rules of the Exchange Act. We file or furnish reports and other information to the SEC to the extent required by the statutory requirements applicable to our Company. Reports and other information filed or furnished by us to the SEC may be inspected and copies obtained at the public reference room maintained by the SEC at 100 F Street, N.E., Washington D.C. 20549. You may obtain information on the operations of the Public Reference Section by calling the SEC at 1-800-732-0330. Our filings with the SEC are also available through the SEC’s website
at http://www.sec.gov and can also be inspected and copies obtained at the offices of the New York Stock Exchange Inc., 20 Broad Street, New York, New York10005.
Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s future earnings and financial position are exposed to fluctuations in foreign currency, interest rate, mandatory investments and the value of long-term obligations in connection with life and disability insurance. In the ordinary course of business, Provida manages its exposure to risk of its trading and investment activities as mentioned below.
Foreign currency exchange rate risk
As a result of its investment in Provida Internacional, Provida is exposed to foreign exchange rate risks. Provida has investments in its associated foreign company AFP Genesis in Ecuador of MUS$1,5, which contributed MCh$1,880 to Provida’s revenues as of December 31, 2013.
An adverse fluctuation in the exchange rate between the U.S. dollar, functional currency in Ecuador, and the Chilean peso could adversely affect profits from this foreign subsidiary and thus, its respective return.
To meet its working capital needs, the Company has various lines of credit and it can be exposed to minor interest rate risk as a result. There is no interest rate risk in relation to current leasing obligations given that the interest rates under these agreements are fixed.
Mandatory investments
Provida’s main asset is mandatory investments and is equivalent to a 1% equity interest in that pension fund. Provida is required to maintain a 1% equity interest in each pension fund it invests in. Mandatory investments in pension funds represent more than 50% of Provida’s total assets under management and given the volatility of local and foreign markets in which the pension funds’ assets are invested; Provida’s future gains/losses on mandatory investments are subject to uncertainty which in turn make Provida’s future earnings from these investments equally uncertain.
Additionally, mandatory investments are held in order to compensate participants in case pension funds do not comply with the legal minimum return requirements, which would imply that Provida would lose part of its equity interest, as the AFP must replenish the 1% of its reserve by its own resources to compensate participants. The minimum return requirement is calculated by taking the industry’s average returns of pension funds of the previous 36 months.
Managing these risks is the responsibility of Provida’s trustee, whose aim is to optimize the returns of each fund for a certain level of risk or minimize the level of risk in order to achieve a target return.
Accordingly, Provida has a risk management policy, which defines the activities and criteria Provida applies to identify, measure, control and manage in an efficient way the risks associated with the fund management. Therefore, Provida manages the equity interest of pension funds under internal limits of credit risk, by analyzing the expected losses and applying measures of market risks. This approach is known as value at risk (“VaR”) and measures the probable impact of adverse conditions in securities prices (fixed income, currencies and variable income) on each Fund Type. Moreover, in order to ensure the reliability of future benefits payment and fulfillment of applicable minimum returns requirements, Provida applies a relative VaR analysis over differing positions between each fund type and to the system’s model portfolio.
Life and disability payment obligations
Life and disability insurance has represented a significant outflow for the Company as this obligation is considered a long-term obligation because the benefits to disabled participants are rendered following the final disability determination test, which is three years after the initial disability determination (defined as a decrease between one -half and two -thirds of one’s working capacity). Until October 2008, the total disability benefits (decrease in more than two thirds of one’s working capacity) were also granted three years after the initial disability determination. See “Item 4. Information on Provida—B. Business overview—Primary expenses.”
In quantitative terms, an AFP had to replenish any shortfall equivalent to the difference between a participant’s savings in his/her individual capitalization account and the benefits granted to him/her by law. These benefits correspond to the present value of the life annuity pension (equivalent to 70% or 50% of the participant’s average taxable remuneration for the last ten years depending on total or partial disability determination) discounted by the life annuity rates in force at the time of the payment. As a result, changes in interest rates impact the final value of an AFP’s payment obligations.
One of the main changes introduced by the Pension Reform Law was the elimination of the AFP’s individual obligation to provide life and disability insurance benefits. On July 1, 2009, a group of insurers was awarded the life and disability administration for a 12 month term. Consequently, Provida only maintains those casualties pending payment due to temporary disability under coverage as of June 30, 2009.
Additionally, insurance regulations governing life and disability insurance policies instructed that casualties reserves should be determined at market interest rate rather than historical rates (defined as the minimum interest rate of the previous semester), giving insurers the alternative of applying such methodology to existing contracts. AFP Provida requested that BBVA Seguros de Vida, adopt such regulation so that Provida’s liabilities would more
accurately reflect the amount that will effectively be paid (i.e. fair value). Likewise, by mutual consent of the parties (previous compensation to the insurer for change in conditions), the financial performance of cash flow surplus was modified with a benchmark determined by assets of similar duration as the insurer’s liability.
In view of changes made in the management of assets and liabilities associated with life and disability insurance, AFP Provida has mitigated the risk associated with interest rate fluctuation.
Finally, Provida has continued recording its obligations at fair value according to its casualty model that considers the future evolution of relevant variables, under prudent scenarios, which may involve the constitution of additional provisions than those required by the regulation that are acknowledged in the balance sheets of insurance companies. During 2013, an expense of MCh$1,940 was recorded as casualty provisions, due to the constitution of reserves for possible survival claims related to deceased participants that were receiving disability pensions.
Operational risk
With respect to operational risk, understood as the risk of errors in the execution of the Company’s processes, AFP Provida has control structures designed both to avoid the occurrence of such errors and to mitigate their impact. For this, the Company combines a preventive view and a reactive view of risk management.
Provida’s internal controls (preventive control) seek to identify the weaknesses and risks of processes before they occur by establishing controls to prevent the occurrence of errors or mitigate their impact. Provida’s operational risk control (detective control) seeks, once a mistake has been made and it has materialized into an operational impact, to establish controls to prevent its recurrence or mitigate its impact.
From this perspective, the major operational risk events of the Company involve "financial compensation" to participants and delays in crediting contributions in participants’ individual accounts. To this end, during the last five years, the Company has continued to develop mitigation processes for these events by adapting operational processes, redefining processes and systems, increasing bandwidth and data processing.
Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
The depositary for our American Depositary Shares (“ADSs”) is the Bank of New York Mellon (“BNYM”).
Holders of our ADSs are generally expected to pay fees to BNYM according to the schedule below:
Persons depositing or withdrawing shares must pay:
For:
U.S.$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
■
Issuance of ADSs, including issuances resulting from a distribution, sale or exercise of shares or rights or other property
■
Cancellation of ADSs for the purpose of withdrawal including if the deposit agreement terminates
U.S.$0.02 (or less) per ADS
■
Any cash distribution to ADSs registered holders
A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs
■
Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADS registered holders
Registration or transfer fees
■
Transfer and registration of shares on the Company’s share register to or from the name of the depositary or its agent when you deposit or withdraw shares
Expenses of the depositary
■
Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement)
■
Converting foreign currency to U.S. dollars
Taxes and other governmental charges the depositary or the custodian have to pay on any ADSs or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes
■
As necessary
Any charges incurred by the depositary or its agents for servicing the deposited securities
BNYM collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. BNYM also collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. BNYM may collect its annual fee for depositary services by deductions from cash distributions, by directly billing investors, or by charging the book-entry system accounts of participants acting for them. BNYM may generally refuse to provide fee-attracting services until its fees for those services are paid.
The Depositary may remit to us all or a portion of the Depositary fees charged for the reimbursement of certain of the expenses we incur in respect of the ADS program established pursuant to the Deposit Agreement upon such terms and conditions as we may agree from time to time. In the year ended December 31, 2013, there were no reimbursements made by the Depositary.
Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
There has been no material default in the payment of principal and interest or any other material default in Provida and its subsidiaries’ debt obligations that has not been resolved within 30 days.
Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Provida, under the supervision of and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, performed an evaluation of the effectiveness as of December 31, 2013 of the design and operation of disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act). There are, as described below, inherent limitations to the effectiveness of any control system, the main one being that these control systems can provide only reasonable assurance of achieving their control objectives.
Following the evaluation process, Provida’s Chief Executive Officer and the Chief Financial Officer concluded that Provida’s disclosure controls and procedures are effective as of December 31, 2013 in ensuring that information in relation to Provida and its consolidated subsidiaries, required to be disclosed in reports filed under the Exchange Act is (1) recorded, processed, summarized and reported for the time periods specified in the SEC’s rules and forms and by the deadlines stipulated, and (2) accumulated and communicated to the management, including the principal financial officers in an appropriate way so as to allow decisions regarding required disclosures.
Management’s Report on Internal Control over Financial Reporting
The management of Provida is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15 (f) of the Exchange Act. Provida’s internal control over financial reporting is a framework designed to provide reasonable assurance, for external purposes, regarding the reliability of financial reporting and the preparation of financial statements in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board and includes policies and procedures that:
-
pertain to the maintenance of records that, accurately and fairly reflect Provida’s transactions and disposals of its assets;
-
provide reasonable assurance that transactions are recorded to permit the preparation of financial statements in accordance with IFRS, and that the Company’s expenditures are being made only in accordance with authorizations of Provida’s management and directors; and
-
provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisitions, use or disposal of the Company’s assets that could have a material effect on the financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision of and with the participation of Provida’s management, including the Chief Executive Officer and the Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in “Internal Control—Integrated Framework (1992)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on an assessment of those criteria, Provida’s management concluded that, as of December 31, 2013, its internal control over financial reporting was effective.
Our internal control over financial reporting as of December 31, 2013 has been audited by Deloitte, an independent registered public accounting firm, as stated in their report which follows below.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
Administradora de Fondos de Pensiones Provida S.A.
We have audited the internal control over financial reporting of Administradora de Fondos de Pensiones Provida S.A. and subsidiaries (the "Company") as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express
an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States of America), the consolidated financial statements as of and for the year ended December 31, 2013 of the Company and our report dated April 29, 2014 expressed an unqualified opinion on those financial statements.
Deloitte® se refiere a Deloitte Touche Tohmatsu Limited una compañía privada limitada por garantía, de Reino Unido, y a su red de firmas miembro, cada una de las cuales es una entidad legal separada e independiente. Por favor, vea en www.deloitte.cl/acerca de la descripción detallada de la estructura legal de Deloitte Touche Tohmatsu Limited y sus firmas miembro.
Deloitte Touche Tohmatsu Limited es una compañía privada limitada por garantía constituida en Inglaterra & Gales bajo el número 07271800, y su domicilio registrado: Hill House, 1 Little New Street, London, EC4A 3TR, Reino Unido.
Changes in Internal Control Over Financial Reporting
There has been no change in Provida’s internal control over financial reporting (as defined in Rule 13a-15(d) of the Exchange Act) during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.
Until October 2 of the fiscal year 2013 Mr. Jesús del Pino Durán and following October 3 of the same year Mr. Jorge Marshall Rivera, both members of the Directors’ Committee, and at Provida’s Board of Directors determination, met the requirements of the “audit committee financial expert” in accordance with SEC rules and regulations. The Board of Directors made this determination based on their understanding of International Financial Reporting Standards (IFRS); their ability to assess the general application of IFRS in connection with the accounting for estimates, provisions and reserves, their experience in analyzing and evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the audited Consolidated Financial Statements, their understanding of internal controls
over financial reporting and their understanding of audit committee functions. All three members of the Directors’ Committee have experience in overseeing and assessing the performance of Provida and its consolidated subsidiaries and its external auditors have experience in the preparation, auditing and evaluation of Provida’s audited Consolidated Financial Statements. The former audit committee’s financial expert, Mr. Jesús del Pino, and the current audit committee’s financial expert Mr. Jorge Marshall currently satisfy the “independence” standard established in Rule 10A-3 of the Exchange Act.
Provida has adopted a code of ethics that is applicable to all employees of Provida. Such document is called the “Código de Conducta” (“Code of Conduct”), and it applies to all officers and employees of all subsidiaries of MetLife, Inc. worldwide. A copy of the Code of Conduct can be obtained from our website, www.provida.cl. A copy will also be provided without charge to any person upon written request to our General Counsel, located at 100 Pedro de Valdivia Avenue, 16th floor, Santiago, Chile.
Aggregate fees billed for each of the last three fiscal years for professional services rendered by Deloitte for the audit of Provida’s annual financial statements or services that are normally provided by Deloitte, in connection with statutory and regulatory filings or engagements for those fiscal years.
(2)
Aggregate fees billed in each of the last three fiscal years for assurance and related services by Deloitte that are reasonably related to the performance of the audit or review of Provida’s financial statements and are not reported under (1) above.
(3)
Aggregate fees billed in each of the last three fiscal years for professional services rendered by Deloitte for tax compliance, tax advice, and tax planning.
(4)
Aggregate fees billed in each of the last three fiscal years for products and services provided by Deloitte other than the services reported in (1), (2) and (3) above.
Item 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
None.
Item 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND RELATED PURCHASERS
In 2013, neither Provida nor any of its related companies purchased any of Provida’s equity securities.
Item 16F. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT
Since the date of the Ordinary Shareholders’ meeting held on April 30, 2013, where it was agreed that Provida would continue to retain the services of the external auditing firm, whose reports appear in this Form 20-F, there have been no changes for the fiscal year 2013.
To review the significant differences between our corporate governance practices and the NYSE Corporate Governance Standards, please see “Item 6. Directors, Senior Management and Employees—C. Board practices”.
English translation of the By-Laws of Administradora de Fondos de Pensiones Provida S.A. (“Provida”) (incorporated herein by reference to Exhibit 1.1 to Provida’s Annual Report on Form 20-F for the year ended December 31, 2010 filed with the Securities and Exchange Commission on May 23, 2011).
The registrant certifies that it meets all of the requirements for filing on Form 20-F and that is has duly caused and authorized the undersigned to sign this annual report on its behalf.
Administradora de Fondos de Pensiones Provida S.A.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
Administradora de Fondos de Pensiones Provida S.A.
We have audited the accompanying consolidated statements of financial position of Administradora de Fondos de Pensiones Provida S.A. and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2013, all expressed in millions of Chilean pesos. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Administradora de Fondos de Pensiones Provida S.A. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (‘‘IASB’’).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States of America), the Company's internal control over financial reporting as of December 31, 2013, based on the criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 29, 2014 expressed an unqualified opinion on the Company's internal control over financial reporting.
Deloitte® se refiere a Deloitte Touche Tohmatsu Limited una compañía privada limitada por garantía, de Reino Unido, y a su red de firmas miembro, cada una de las cuales es una entidad legal separada e independiente. Por favor, vea en www.deloitte.cl/acerca de la descripción detallada de la estructura legal de Deloitte Touche Tohmatsu Limited y sus firmas miembro.
Deloitte Touche Tohmatsu Limited es una compañía privada limitada por garantía constituida en Inglaterra & Gales bajo el número 07271800, y su domicilio registrado: Hill House, 1 Little New Street, London, EC4A 3TR, Reino Unido.
Net cash flows from (used in) operating activities
77,922
93,965
85,947
Cash flows from (used in) investing activities
Proceeds from sales of property, plant and equipment
1,319
3,247
911
Proceeds from sales of shares from mandatory investments
10,471
7,410
8,809
Proceeds from sales of equity method investees
93,295
-
-
Payments for acquiring shares of mandatory investments
(13,338
)
(8,549
)
(9,170
)
Purchase of property, plant and equipment
(1,936
)
(4,381
)
(3,670
)
Other cash outflows from investing activities
(503
)
(1,472
)
(14,575
)
Other cash inflows from investing activities
17,238
5,932
1,135
Net cash flows from (used in) investing activities
106,547
2,187
(16,560
)
Cash flows from (used in) financing activities:
Proceeds from borrowings
26
5,058
3,145
Proceed from borrowings from related companies
105,442
9,551
7,400
Repayments of borrowings
(265
)
(4,519
)
(2,816
)
Repayments of borrowing from related companies
(105,600
)
(9,439
)
(8,430
)
Dividend paid
(180,289
)
(91,649
)
(69,760
)
Net cash flows from (used in) financing activities
(180,686
)
(90,998
)
(70,461
)
Net increase (decrease) in cash and cash equivalents before effect of exchange rate changes
3,784
5,154
(1,074
)
Effect of exchange rate changes on cash and cash equivalents
-
-
-
Net increase (decrease) in cash and cash equivalents
3,784
5,154
(1,074
)
Cash and cash equivalents at beginning of period
41,245
36,091
37,165
Cash and cash equivalents at end of period
45,029
41,245
36,091
F-8
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
CORPORATE INFORMATION
AFP Provida S.A. is a public corporation and legally domiciled at 100 Pedro de Valdivia Avenue, 16th floor, commune of Providencia in Santiago de Chile. The terms “AFP Provida”, “Provida” and “Company”, refer to the Pension Funds Administrator AFP Provida S.A., unless otherwise stated. References to “AFP” or “AFPs” refer to private pension funds administrators in general.
AFP Provida was constituted by public deed granted by Mr. Patricio Zaldivar Mackenna, Notary of Santiago, on March 3, 1981, and authorized to initiate activities by the Superintendency of Pensions, through Resolution
No. E-006/81 of April 1, 1981.
The sole objective of the Company is to administer Provida’s Pension Funds Types A, B, C, D and E, under the terms established in Decree Law 3.500 of 1980 and its amendments, and to provide the services as established therein. From 1994 onward, through Law 19.301, the business of the AFPs was expanded by allowing them to invest in pension business-related entities. Likewise, they were allowed to invest in central securities depositories entities as referred to in Law No. 18,876.
On June 13, 1983, AFP Provida was registered in the Securities Registry of the Superintendency of Securities and Insurance (SVS) under number 0211, initiating affiliation activities into the system on May 2, 1981, and collecting contributions from June 1 of the same year.
Business activities of AFP Provida are regulated by the Superintendency of Pensions.
Change of controlling parent
Pursuant to an agreement with Banco Bilbao Vizcaya Argentaria, S.A. and BBVA Inversiones Chile S.A. (together, "BBVA"), a subsidiary of MetLife, Inc. acquired 64.32% of the outstanding shares of AFP Provida from BBVA and conducted a public cash tender offer, through which MetLife acquired an additional 27.06% of the outstanding shares of AFP Provida. As a result, as of October 1, 2013, MetLife Inc., through its wholly-owned Chilean subsidiaries Inversiones Previsionales S.A. and MetLife Acquisition Co., owned 91.38% of the total outstanding shares of AFP Provida, for a total acquisition price of US$1.9 billion.
NOTE 2.
GENERAL INFORMATION
a)
Regulation of the Pension System
Pension Funds Administrators are corporations whose sole and exclusive objective is to administer Pension Funds, as well as grant and administer their benefits and services as required by law. AFPs are subject to the rules and regulations of Decree Law 3,500 of 1980 of the Superintendency of Pensions and, in supplementary form, the requirements of Law No. 18,046 of Corporations issued in 1981.
Law No. 20,255, which became effective on July 1, 2009, introduced amendments to DL No. 3,500 in relation to the Pension Reform, as well as Law No. 20,366, which regulates the benefits of the Solidarity Pension system.
The Superintendency of Pensions is the regulatory body that oversees AFPs through monitoring legal, administrative and financial aspects of their operations, sanctioning any non-compliance with regulations, and ensuring full compliance with minimum capital and mandatory investment requirements.
b)
Economic Activity
To strengthen its competitive position, Provida, like other large AFPs, merged with smaller AFPs in order to increase its market share and reach economies of scale.
On May 2, 1995, through Resolution No. E-107-95, the Superintendency of Pensions authorized the Company’s merger with El Libertador Pensions Fund.
F-9
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On May 28, 1998, Provida acquired a 99.99% ownership interest of AFP Unión S.A. (“AFP Unión”) from Inversiones Interamericana S.A. Resolution No. E-146-98 authorized the merger with AFP Provida and their respective pension funds on June 1, 1998.
On March 18, 1998, Corp Group Pensions acquired an 89.1% ownership interest of AFP Protección S.A. (“AFP Protección”); subsequently, on January 1, 1999, Provida acquired AFP Protección’s ownership interest held by Corp Group Pensions and by minority shareholders. Resolution No. E-156-98 authorized the merger with AFP Provida and its respective pension funds on January 1, 1999.
Furthermore, starting in 1993, Provida began to participate in private pension funds systems in other Latin American countries by acquiring ownership interests in AFP Horizonte (Peru), AFP Génesis (Ecuador) and AFORE Bancomer (Mexico) through its wholly-owned subsidiary Provida Internacional.
On November 27, 2012, the Extraordinary Shareholders Meeting of Provida Internacional S.A., approved the sale of its shares held on the Mexican investee AFORE Bancomer. The net gain on sale was MCh$38,755.
Subsequently, on January 23, 2013, the Shareholders Meeting of Provida Internacional S.A. approved the sale of its shares held on the Peruvian investee AFP Horizonte. The net gain on sale was MCh$26,834.
Currently, Provida only holds a controlling equity interest in AFP Génesis in Ecuador.
Within Chile, AFP Provida is an important shareholder of the Centralized Securities Depository (“DCV”) holding a 23.14% of equity interest, and of PreviRed.com, an entity that offers online services for the collection of pension fund contributions, where Provida holds a 37.87% ownership interest. Furthermore, in January 2002, a new company known as the Administradora de Fondos de Cesantia de Chile S.A. (“AFC”) was created as a result of the approval by a consortium comprised of AFPs, in order to administer Unemployment Insurance. Operations began on October 1, 2002, and AFP Provida currently holds a 49.2% ownership interest (37.8% directly and 11.4% indirectly). AFC is currently in the process of liquidation as the administration of the unemployment insurance license has expired. The liquidation process will be finalized after the Superintendency of Pensions
provides clearance over such process, which shall not exceed three years.
The law requires that all AFPs have one single social objective and are authorized to provide the following services:
Collect and administer contributions made by participants - The collection and administration service that AFPs provide refers to both mandatory and voluntary contributions made by participants.
Invest contributions of participants in pension funds administered by the AFP - In terms of the general objective of its investing activities, Provida administers the investment portfolios composed of participants contributions, seeking the highest possible returns based on the risk level and terms of each participants’ profile. For this purpose and according to prevailing regulations, participants can choose from five types of funds that allow them to maximize their expected pension in accordance with their specific risk profile. The types of funds differentiate themselves, as stipulated by law, by the percentage invested in variable income securities. Hence, the funds are classified from Fund Type A, with the highest level of variable income securities, to Fund Type E, which includes a maximum 5% invested in variable income securities. Investing activities are strictly regulated by the Superintendency
of Pensions in order to ensure that the investment portfolio by type of fund complies with the variable income risk permitted in each one.
Manage life and disability benefits for participants - Until June 2009, Provida contracted insurance to cover its obligation to provide life and disability benefits for its participants. The Pension Reform Law eliminated the individual responsibility of AFPs in connection with the life and disability insurance, by establishing that the AFPs as a group purchase a single, fixed insurance premium through a bidding process to cover this obligation. Such insurance is awarded to one or more insurance companies, based on the best economic offer.
In May 2009, the first bidding process was held, for a 12-month coverage period beginning on July 1, 2009 of life and disability insurance. The cost of the insurance under this new format was 1.87% of the contributable salaries of participants in the AFPs. Therefore, since Provida no longer provided coverage of this insurance, the Company reduced the fees charged to its participants from 2.64% to 1.54% of contributable salaries beginning July 2009.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In May 2010, the second bidding process for life and disability insurance was held by the AFPs for the period July 2010-June 2012. The rate was reduced to 1.49% of the contributable salaries.
In May 2012, the third bidding process for life and disability insurance was held, effective July 1, 2012 for a 24-month coverage period (July 2012-June 2014). The related premium is 1.26% of the contributable salaries.
In the case of dependent workers, the contribution to finance the insurance (additional contribution) is paid by the employer, except for dependent workers between 18 and 35 years old who receive pension subsidies. This obligation became effective on July 1, 2009, and a temporary grace period for workers with fewer than 100 employees ended in June 2011. Beginning in July 2011, the insurance cost is financed completely by employers.
Provide retirement pension for participants - The service of providing retirement pensions stipulates that each AFP must furnish the specific benefits of retirement pensions to its participants who meet the legal retirement age requirement of 60 years for women and 65 years for men.
Finally, the last change introduced by the Pension Reform in 2010 refers to the bidding process of all new participants entering to the private pension system over a 24-month period. This change was adopted to motivate price competition so as to obtain lower commissions for the participant; to generate greater price sensitivity to the demand; to ease the entry of new entities into the AFP industry; and to safeguard the participants’ pensions.
The bid is awarded to the AFP offering the lowest fee commission rate (lower than those prevailing at the date of the bid) for a 24-month period. The lowest fee commission rate shall be applied to the existing portfolio and the new affiliates.
AFP Modelo was awarded with new participants entering into the pension system through offering the lowest fee commission rate of 1.14%, in the 2010 bidding process for a 24-month. Also, AFP Modelo was awarded with new participants in the second bidding process in 2012 through offering the lowest fee commission rate of 0.77%.
In January 2014, the third bidding process was held where AFP Planvital was awarded with new participants through offering the lowest fee commission of 0.47%.
Provida believes it has competitive advantages in order to successfully face new conditions in the industry. In addition, Provida has implemented processes and developments to fully comply with the amendments of the Pension Reform Law, and it is continuously training its employees in order to provide the best service to its customers.
NOTE 3.
APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
a)
New and revised IFRS effective in the current year
IFRS 10, IFRS 11 and IFRS 12 – Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities– Transition Guidance
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
IFRS 10, Consolidated Financial Statements
On May 12, 2011, the IASB issued IFRS 10 Consolidated Financial Statements, which is a replacement of IAS 27 Consolidated and Separate Financial Statements and SIC – 12 Consolidation – Special Purpose Entities. The objective of IFRS 10 is to have a single basis for consolidation for all entities, regardless of the nature of the investee, and that basis is control. The definition of control includes three elements: power over an investee, exposure or rights to variable returns of the investee and the ability to use power over the investee to affect the investor’s returns. IFRS 10 provides detailed guidance on how to apply the control principle in a number of situations, including agency relationships and holdings of potential voting rights. An investor would reassess whether it controls an investee if there is a change in facts
and circumstances. IFRS 10 replaces those parts of IAS 27 that address when and how an investor should prepare consolidated financial statements and replaces SIC – 12 in its entirety. The effective date of IFRS 10 is January 1, 2013, with earlier application permitted under certain circumstances. Management estimates that these changes have not had an impact on the accounting policies for the period.
IFRS 11, Joint Arrangements
On May 12, 2011, the IASB issued IFRS 11 Joint Arrangements which supersedes IAS 31 Interests in Joint Ventures and SIC – 13 Jointly Controlled Entities – Non-Monetary Contributions by Venturers. IFRS 11 classifies joint arrangements as either joint operations (combining the existing concepts of jointly controlled assets and jointly controlled operations) or joint ventures (equivalent to the existing concept of a jointly controlled entity). A joint operation is a joint arrangement whereby the parties that have joint control have rights to the assets and obligations for the liabilities. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.
IFRS 11 requires the use of the equity method of accounting for interests in joint ventures thereby eliminating the proportionate consolidation method. The effective date of IFRS 11 is January 1, 2013, with earlier application permitted under certain circumstances. Management estimates that these changes have not had an impact on the accounting policies for the period.
IFRS 12, Disclosure of Interests in Other Entities
On May 12, 2011, the IASB issued IFRS 12 Disclosure of Interests in Other Entities which requires extensive disclosures relating to an entity’s interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities. IFRS 12 establishes disclosure objectives and specifies minimum disclosures that an entity must provide to meet those objectives. An entity should disclose information that helps users of its financial statements evaluate the nature and risks associated with interests in other entities and the effects of those interests on its financial statements. The disclosure requirements are extensive and significant effort may be required to accumulate the necessary information. The effective date of IFRS 12 is January
1, 2013 but entities are permitted to incorporate any of the new disclosures into their financial statements before that date. Management estimates that these amendments have not had an impact on the disclosures for the period.
IAS 27 (2011), Separate Financial Statements
IAS 27 (2008) Consolidated and Separate Financial Statements has been amended for the issuance of IFRS 10 but retains the current guidance for separate financial statements. Management estimates that this Standard has not had an impact on the accounting policies for the period as the Company does not prepare separate financial statements.
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ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
IAS 28 (2011), Investments in Associates and Joint Ventures
IAS 28 Investments in Associates has been amended for conforming changes based on the issuance of IFRS 10 and IFRS 11.
Management estimates that these changes have not had an impact on the accounting policies for the period.
IFRS 13, Fair Value Measurement
On May 12, 2011, the IASB issued IFRS 13 Fair Value Measurement, which establishes a single source of guidance for fair value measurement under IFRS. The Standard applies to both financial and non-financial items measured at fair value. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” (i.e., an exit price). IFRS 13 is effective for annual periods beginning on or after January 1, 2013, with early adoption permitted, and applies prospectively from the beginning of the annual period in which the Standard is adopted. Management estimates that these amendments have not had an impact on the accounting policies for the period.
Amendment to IAS 19, Employee Benefits
On June 16, 2011, the IASB issued amendments to IAS 19 Employee Benefits (2011) that change the accounting for defined benefit plans and termination benefits. The amendments require the recognition of changes in the defined benefit obligation and in plan assets when those changes occur, eliminating the corridor approach and accelerating the recognition of past service costs.
Changes in the defined benefit obligation and plan assets are disaggregated into three components: service costs, net interest on the net defined benefit liabilities (assets) and remeasurements of the net defined benefit liabilities (assets).
Net interest is calculated using high quality corporate bond yield. This may be lower than the rate used to calculate the expected return on plan assets, resulting in a decrease in net income. The amendments are effective for annual periods beginning on or after January 1, 2013, with earlier application permitted. Retrospective application is required with certain exceptions. Management estimates that these changes have not had an impact on the accounting policies for the period.
Amendments to IAS 1, Presentation of Financial Statements
On June 16, 2011, the IASB issued Presentation of Items of Other Comprehensive Income (amendments to IAS 1). The amendments retain the option to present profit or loss and other comprehensive income in either a single continuous statement or in two separate but consecutive statements. Items of other comprehensive income are required to be grouped into those that will and will not subsequently be reclassified to profit or loss. Tax on items of other comprehensive income is required to be allocated on the same basis. The measurement and recognition of items of profit or loss and other comprehensive income are not affected by the amendments, which are applicable for reporting periods beginning on or after July 1, 2012 with earlier application permitted. Other than the above mentioned presentation changes,
the application of the amendments to IAS 1 does not result in any impact on profit or loss, other comprehensive income and total comprehensive income.
Amendment to IFRS 7, Offsetting Financial Assets and Financial Liabilities
IFRS 7Financial Instruments: Disclosures was amended to require information about all recognized financial instruments that are set off in accordance with paragraph 42 of IAS 32 Financial Instruments: Presentation. The amendments also require disclosure of information about recognized financial instruments subject to enforceable master netting arrangements and similar agreements even if they are not set off under IAS 32. The IASB believes that these disclosures will allow financial statement users to evaluate the effect or potential effect of netting arrangements, including rights of set-off associated with an entity's recognized financial assets and recognized financial liabilities, on the entity's financial position. The amendments are effective for annual periods beginning on or after January 1, 2013. Early application is permitted.
Management estimates that these amendments have not had an impact on the accounting policies for the period.
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ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Amendments to IFRS 10 – Consolidated Financial Statements; IFRS 11 – Joint Arrangement and IFRS 12 – Disclosure of Interests Other Entities – Transition Guidance
On June 28, 2012, the IASB published Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities (Amendments to IFRS 10, IFRS 11, and IFRS 12). The amendments are intended to provide additional transition relief in for IFRS 10, IFRS 11 and IFRS 12 by limiting the requirement to provide adjusted comparative information to only the preceding comparative period. Also, amendments to IFRS 11 and IFRS 12 eliminate the requirement to provide comparative information for periods prior to the immediately preceding period. The effective date of these amendments is for periods. The effective date of these amendments, annual periods beginning on or after 1 January 2013, is aligned with the effective dates of IFRS 10, IFRS 11 and IFRS 12. Management estimates that these amendments have not had an impact on the Accounting Policies
for the period.
b)
New and revised IFRS in issue but not yet effective:
Investment Entities – Amendments to IFRS 10, Consolidated Financial Statements; IFRS 12 Disclosure of Interests with Other Entities and IAS 27 Separate Financial Statements
On November 12, 2009, the IASB issued IFRS 9 Financial Instruments (IFRS 9). This Standard introduces new requirements for the classification and measurement of financial assets and is effective from 1 January 2013 with early adoption permitted. IFRS 9 specifies how an entity shall classify and measure its financial assets. This Standard requires that all financial assets be classified on the basis of an entity's business model for managing the financial assets and the contractual cash flow characteristics of the financial asset. Financial assets are either measured at amortized cost or at fair value. Only those financial assets measured at amortized cost are tested for impairment. Additionally, on 28 October 2010, the IASB published a revised version of IFRS 9. The revised standard retains the requirements for classification and measurement of financial
assets that were published in November 2009 but adds guidance on the classification and measurement of financial liabilities. As part of its restructuring of IFRS 9, the IASB also copied the guidance on derecognition of financial instruments and related implementation guidance from IAS 39 to IFRS 9. This new guidance concludes the first part of Phase 1 of the Board's project to replace IAS 39. The other phases, impairment and hedge accounting, are not yet completed.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The guidance included in IFRS 9 on the classification and measurement of financial liabilities is unchanged from the classification criteria for financial liabilities currently contained in IAS 39. In other words, financial liabilities will continue to be measured either wholly, or in part, at amortized cost or at fair value through profit or loss (FVTPL). The concept of bifurcating embedded derivatives from a financial liability host contract also remains unchanged. Financial liabilities held for trading would continue to be measured at FVTPL, and all other financial liabilities would be measured at amortized cost unless the fair value option is applied, using the existing criteria in IAS 39.
However, there are two differences compared to IAS 39:
·
The presentation of the effects of changes in fair value attributable to a liability’s credit risk; and
·
The elimination of the cost exemption for derivative liabilities to be settled by delivery of unquoted equity
On December 16, 2011, the IASB issued Mandatory Effective Date of IFRS 9 and Transition Disclosures, deferring the mandatory effective date of both the 2009 and 2010 versions to annual periods beginning on or after January 1, 2015. Prior to the amendments, application of IFRS 9 was mandatory for annual periods beginning on or after January 1, 2013. The amendments modify the requirements for transition from IAS 39 Financial Instruments: Recognition and Measurement to IFRS 9. In addition, the amendments also modify IFRS 7 Financial Instruments: Disclosures to add certain requirements in the reporting period containing the date of initial application of IFRS 9.
On November 19, 2013, the IASB issued a revised version of IFRS 9 which introduces a new chapter to IFRS 9 on hedge accounting, putting in place a new hedge accounting model that is designed to be more closely aligned with how entities undertake risk management activities when hedging financial and non-financial risk exposures. The revised version of IFRS 9 Permits an entity to apply only the requirements introduced in IFRS 9 (2010) for the presentation of gains and losses on financial liabilities designated as at fair value through profit or loss without applying the other requirements of IFRS 9, meaning the portion of the change in fair value related to changes in the entity's own credit risk can be presented in other comprehensive income rather than within profit or loss. In addition, the revised version of IFRS 9 Removes the mandatory effective date of IFRS 9 (2013), IFRS
9 (2010) and IFRS 9 (2009), leaving the effective date open pending the finalization of the impairment and classification and measurement requirements. The amendments are effective for periods beginning on or after January 1, 2018.
Management has not had the opportunity to consider the potential impact of the adoption of these amendments.
IFRS 14, Regulatory Deferral Accounts
On January 30, 2014 the IASB issued IFRS 14 Regulatory Deferral Accounts. This standard is applicable to first-time adopter of IFRS and for entities which are involved in rate-regulated activities and recognized regulatory deferral account balances under its previous general accepted accounting principles. This standard requires separate presentation of regulatory deferral account balances in the statement of financial position and statement of comprehensive income. IFRS 14 is effective for an entity’s first annual IFRS financial statements for a period beginning on or after January 1, 2016, with earlier application permitted.
Management does not anticipate that the application of this new standard will have any effect on the consolidated financial statements as the Company is not a first-time adopter and it is not involved in rate-regulated activities nor has recognized any regulatory deferral account balances under its previous general accepted accounting principles.
Amendment to IAS 19 (2011), Employee Benefits
On November 21, 2013, the IASB amended IAS 19 (2011) Employee Benefits to clarify the requirements that relate to how contributions from employees or third parties that are linked to service should be attributed to periods of service. The amendments permit contributions that are independent of the number of years of service to be recognized as a reduction in the service cost in the period in which the service is rendered, instead of allocating the contributions to periods of service. Other contributions by employees or third parties are required to be attributed to periods of service either using the plan’s contribution formula or on a straight-line basis. The amendments are effective for periods beginning on or after July 1, 2014, with earlier application permitted. Management anticipates that the application
of these amendments will not have an impact on the applicable accounting policies as the Company has not granted defined benefit plans to its employees.
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ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Amendment to IAS 32, Financial Instruments: Presentation
In December 2011, the IASB amended the accounting requirements and disclosures related to offsetting of financial assets and financial liabilities by issuing amendments to IAS 32 Financial Instruments: Presentation and IFRS 7 Financial Instruments: Disclosures. These amendments are the result of the IASB and US Financial Accounting Standards Board (‘FASB’ undertaking a joint project to address the differences in their respective accounting standards regarding offsetting of financial instruments. The amendments to IAS 32 are effective for annual periods beginning on or after January 1, 2014. Both require retrospective application for comparative periods.
Management believes that this new standard will be adopted in its financial statements for the period beginning January 1, 2014. Last, Management does not anticipate that the adoption of these amendments will have any effect on its consolidated financial statements.
Investment Entities – Amendments to IFRS 10 – Consolidated Financial Statements; IFRS 12 – Disclosures of Involvement in Other Entities and IAS 27 – Separate Financial Statements
On October 31, 2012, the IASB published “Investment Entities (amendments to IFRS 10, IFRS 12 and IAS 27)”, providing an exemption from consolidation of subsidiaries under IFRS 10 'Consolidated Financial Statements' for entities which meet the definition of an 'investment entity', such as certain investment funds. Instead, such entities would measure their investment in particular subsidiaries at fair value through profit or loss in accordance with IFRS 9 'Financial Instruments' or IAS 39 “Financial Instruments: Recognition and Measurement”.
The amendments also require additional disclosure about why the entity is considered an investment entity, details of the entity's unconsolidated subsidiaries, and the nature of relationship and certain transactions between the investment entity and its subsidiaries. In addition, the amendments require an investment entity to account for its investment in a relevant subsidiary in the same way in its consolidated and separate financial statements (or to only provide separate financial statements if all subsidiaries are unconsolidated). The amendments are effective for annual periods beginning on or after January
1, 2014, with early application permitted.
Management does not anticipate that the investment entities amendments will have any effect on its consolidated financial statements as the Company is not an investment entity.
Amendments to IAS 36 – Recoverable Amount Disclosures for Non-Financial Assets
On May 29, 2013 the IASB published “Amends to IAS 36 Recoverable Amount Disclosures for Non-Financial Assets. The publication of IFRS 13 Fair Value Measurements amended certain disclosure requirements in IAS 36 Impairment of Assets with respect to measuring the recoverable amount of impaired assets. However, one of the modifications to the disclosure requirements was more extensive than originally intended. The IASB has rectified this with the publication of these amendments to IAS 36.
The amendments to IAS 36 removed the requirement to disclose the recoverable amount of each cash-generating unit (group of units) for which the carrying amount of goodwill or intangible assets with indefinite useful lives allocated to that unit (group of units) was significant compared with the total carrying amount of goodwill or intangible assets with indefinite useful life of the entity. The amendments require an entity to disclose the recoverable amount of an individual asset (including goodwill) or a cash-generating unit to which the entity recognized or reversed a deterioration during the reporting period. An entity shall disclose information about the fair value less costs to sell of an individual asset, including goodwill, or a cash-generating unit to which the entity recognized or reversed an impairment loss during the reporting period, including: (i) the level of the fair value hierarchy (IFRS 13), (ii) the valuation
techniques used to measure fair value less costs to sell, and (iii) the key assumptions used in fair value measurement categorized within "Level 2" and "Level 3" of the fair value hierarchy. In addition, an entity should disclose the discount rate used when an entity recognized or reversed an impairment loss during the reporting period and the recoverable amount should be based on the fair value less costs to sell determined using a present value valuation technique. The amendments should be applied retrospectively for annual periods beginning on or after January 1, 2014. Earlier application is permitted.
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ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Management anticipates that other than the disclosure requirements, if applicable, these amendments will not have any effect on the Company’s consolidated financial statements.
Amendments to IAS 39 – Novation of Derivatives and Continuation of Hedge Accounting
In June 2013, the IASB published Amendments to IAS 39 – Novation of Derivatives and Continuation of Hedge Accounting. This modification permits the continuation of hedge accounting (under IAS 39 and the next chapter on hedge accounting under IFRS 9) when a derivative is novated to a central counterparty and certain conditions are met. A novation indicates an event where the original parties to a derivative agree that one or more clearing counterparties replace their original counterparty to become the new counterparty to each of the parties. In order to apply the amendments and continue hedge accounting, novation to a central counterparty must happen as a consequence of laws or regulations or the introduction of laws or regulations. The amendments are effective for annual periods beginning on or after January 1, 2014, with early application permitted.
Management anticipates that these amendments will not have an effect on the consolidated financial statements as the Company does not enter into hedge accounting transactions.
IFRIC 21, Levies
On May 20, 2013, the IASB published the IFRIC 21, Levies. The new interpretation provides guidance on when to recognize a liability for a levy imposed by a government, both for levies that are accounted for in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets and those where the timing and amount of the levy is certain. This interpretation defines a levy as "a resource outflow involving future economic benefits that are imposed by governments on entities in accordance with the law". Taxes within the scope of IAS 12 Income Taxes are excluded from the scope as well as fines and penalties. The payments to governments for services or the acquisition of an asset under a contractual arrangement are also excluded. That is, the tax should be a non-reciprocal transfer to a government when the taxpaying entity does not receive goods or services in
return. For the purpose of interpretation, a "government" is defined in accordance with IAS 20 Accounting for Government Grants and Disclosures of Government Assistance. When an entity acts as an agent of a government to collect a tax, the cash flows received from the agency are outside the scope of this interpretation. This interpretation identifies the event which gives rise to the obligation to recognize a liability, which is the payment of tax in accordance with the relevant legislation. IFRIC 21 provides the following guidance on recognition of a liability to pay levies: (i) the liability is recognized progressively if the obligating event occurs over a period of time; (ii) if an obligation is triggered on reaching a minimum threshold, the liability is recognized when that minimum threshold is reached. The interpretation is applicable retrospectively for annual periods beginnings on or after January 1, 2014.
Management has not had the opportunity to consider the potential impact of the adoption of this new Interpretation.
NOTE 4.
ACCOUNTING POLICIES
a)
Statement of compliance with International Financial Reporting Standards (IFRS)
These consolidated financial statements as of December 31, 2013, have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (hereinafter “IASB”).
Management has determined that the appropriate presentation of both 1) current tax assets and liabilities and 2) deferred tax assets and liabilities is to present them on an offset basis, where applicable. Therefore, in the December 31, 2012 Statement of Financial Position, the Company reclassified MCh$896 of deferred tax assets as an offset to deferred tax liabilities and MCh$18,850 of current tax assets as an offset to current tax liabilities, respectively. Management has determined that the effects of these reclassifications are not material to the 2012 Statement of Financial Position. This presentation is consistent with the presentation as of December 31, 2013. Note 11 of these financial statements has been revised to reflect disclosure
in accordance with such reclassifications.
These consolidated financial statements were approved by the Board of Directors at meeting held on February 27, 2014, and submitted for approval at General Shareholders’ meeting to be held on April 30, 2014.
Figures in the financial statements are expressed in millions of Chilean pesos (MCh$) rounded up, unless otherwise stated.
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ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
b)
Basis of consolidation
The consolidated financial statements incorporate the financial statements of AFP Provida and entities controlled by AFP Provida and its subsidiaries. Control is achieved when the Company has all three of the following criteria:
·
has power over the investee;
·
is exposed, or has rights, to variable returns from its involvement with the investee; and
·
has the ability to use its power to affect its returns
AFP Provida reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.
When AFP Provida has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally.
Consolidation of a subsidiary begins when AFP Provida obtains control over the subsidiary and ceases when it loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss and other comprehensive income from the date AFP Provida gains control until the date when it ceases to control the subsidiary.
Profit or loss and each component of other comprehensive income are attributed to the owners of AFP Provida and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of AFP Provida and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.
When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the consolidated accounting policies.
All intragroup assets, liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full upon consolidation.
The following table sets forth the subsidiaries incorporated in the consolidated financial statements of Provida as of December 31, 2013, 2012 and 2011:
Ownership interest %
Subsidiary
Country
12.31.2013
12.31.2012
12.31.2011
Provida Internacional S.A.
Chile
99.99%
99.99%
99.99%
AFP Génesis Ecuador
Ecuador
99.99%
99.99%
99.99%
b.1) Changes in AFP Provida's ownership interests in existing subsidiaries
Changes in AFP Provida's ownership interests in subsidiaries that do not result in the Company losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of AFP Provida's interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to owners of the
Company.
When AFP Provida loses control of a subsidiary, a gain or loss is recognized in profit or loss and is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any non-controlling interests. When the assets of the subsidiary are accounted for at fair value and the corresponding profit or loss accumulated has been recognized in other comprehensive income and accumulated in equity, the amounts previously recognized in other comprehensive income in relation to that subsidiary are accounted for as if AFP Provida had directly disposed of the related assets or liabilities of the subsidiary (i.e. reclassified to profit or loss or transferred to another category of equity as specified by applicable IFRSs). The fair value of any investment
retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for
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ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
subsequent accounting under IAS 39 Financial Instruments –Recognition and Measurement-, when applicable, as the cost on initial recognition of an investment in an associate or a joint venture.
c)
Investments in associates
An associate is an entity over which AFP Provida has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.
The results and assets and liabilities of associates are incorporated in these consolidated financial statements using the equity method of accounting, except when the investment, or a portion thereof, is classified as held for sale, in which case it is accounted for in accordance with IFRS 5. Under the equity method, an investment in an associate is initially recognized in the consolidated statement of financial position at cost and adjusted thereafter to recognize AFP Provida's share of the profit or loss and other comprehensive income of the associate. When AFP Provida's share of losses of an associate exceeds its interest in that associate, AFP Provida discontinues recognizing its share of further losses. Additional losses are recognized only to the extent that AFP Provida has incurred legal or constructive obligations or made payments on behalf of the associate.
The requirements of IAS 39 are applied to determine whether it is necessary to recognize any impairment loss with respect to AFP Provida’s investment in an associate. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with IAS 36 Impairment of Assets as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount, Any impairment loss recognized forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognized in accordance with IAS 36 to the extent that the recoverable amount of the investment subsequently increases.
AFP Provida will discontinue the use of the equity method from the date when the investment ceases to be an associate. When AFP Provida retains an interest in the former associate and the retained interest is a financial asset, the Company measures the retained interest at fair value at that date and the fair value is regarded as its fair value on initial recognition in accordance with IAS 39. The difference between the carrying amount of the associate at the date the equity method was discontinued, and the fair value of any retained interest and any proceeds from disposing of a part interest in the associate is included in the determination of the gain or loss on disposal of the associate. In addition, AFP Provida accounts for all amounts previously recognized in other comprehensive income in relation to that associate on the same basis as
would be required if that associate had directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously recognized in other comprehensive income by that associate would be reclassified to profit or loss on the disposal of the related assets or liabilities, AFP Provida reclassifies the gain or loss from equity to profit or loss (as a reclassification adjustment) when the equity method is discontinued.
AFP Provida continues to use the equity method when an investment in an associate becomes an investment in a joint venture. There is no remeasurement to fair value upon such changes in ownership interests.
When AFP Provida reduces its ownership interest in an associate but it continues to use the equity method, AFP Provida reclassifies to profit or loss the proportion of the gain or loss that had previously been recognized in other comprehensive income relating to that reduction in ownership interest if that gain or loss would be reclassified to profit or loss on the disposal of the related assets or liabilities.
When a group entity transacts with an associate of AFP Provida, profits and losses resulting from the transactions with the associate are recognized in the AFP Provida's consolidated financial statements only to the extent of interests in the associate or joint venture that are not related to the AFP Provida.
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ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the associates incorporated in the consolidated financial statements of Provida as of December 31, 2013, 2012 and 2011:
Ownership interest %
Subsidiary
Country
12.31.2013
12.31.2012
12.31.2011
Soc.Adm. de Fondos de Cesantia de Chile S.A.
Chile
49.20%
37.80%
37.80%
Inversiones DCV S.A.
Chile
23.14%
23.14%
23.14%
Servicio de Adm. Previsional S.A.
Chile
37.87%
37.87%
37.87%
AFORE Bancomer (*)
Mexico
-
7.50%
7.50%
AFP Horizonte (*)
Peru
-
15.87%
15.87%
(*) On November 30, 2012, these associates were classified as non-current assets and disposal groups held for sale. The sale of these associates occurred in January 2013. See more information in Note 15.
d)
Key assumptions for estimating uncertainties
The information contained in these consolidated financial statements is the responsibility of the Company’s Board of Directors which expressly states that each and every applicable principle and criterion included in IFRS has been fully applied.
On preparing the consolidated financial statements, specific estimates made by the Company’s management were used to measure certain assets, liabilities, income, and expenses.
These estimates primarily refer to:
-
Measurement of tangible and intangible assets, including Goodwill, to determine any losses resulting from their impairment.
-
Useful lives of property, plant and equipment and intangibles.
-
Information available to determine the fair value of financial instruments.
-
Probability of occurrence and estimate contingent liabilities.
-
Taxable income of the companies included in the consolidated financial statement, to be declared before the respective tax authorities in the future, that have served as a base to record different balances related to income tax in these consolidated financial statements.
Although these estimates were made according to the best information available at the time of these consolidated financial statements on the facts analyzed, it is possible that events which may occur in the future may obligate the Company to modify them (increase or decrease) in future periods. This would be made prospectively, recognizing the effects of the change in estimates in the corresponding subsequent consolidated financial statements.
e)
Foreign currencies transactions
In preparing the financial statements of each individual group entity, transactions in currencies other than the entity's functional currency (foreign currencies) are recognized at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.
Exchange differences on monetary items are recognized in profit or loss in the period in which they arise.
For the purposes of presenting the consolidated financial statements, the assets and liabilities of AFP Provida's foreign operations are translated into Chilean Pesos using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are recognized in other comprehensive income and accumulated in equity in the reserve of exchange differences on translation item.
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ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On the disposal of a foreign operation, all of the exchange differences accumulated in equity in respect of that operation attributable to the owners of AFP Provida are reclassified to profit or loss.
Goodwill and fair value adjustments to identifiable assets acquired and liabilities assumed through acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the rate of exchange prevailing at the end of each reporting period. Exchange differences arising are recognized in equity.
The functional and presentation currency of the consolidated financial statements is the Chilean peso.
f)
Cash and cash equivalents
Cash and cash equivalents include cash on hand and in banks, time deposits and short-term highly liquid investments, with an insignificant risk of changing values and original maturity of no more than three months from their date of acquisition.
The direct method was used to prepare the consolidated statements of cash flows.
g)
Financial instruments
Financial assets are classified into the following specified categories: financial assets at fair value through profit or loss (FVTPL), loans and receivables, held-to-maturity' investments and available-for-sale (AFS) financial assets. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis.
g.1) Effective interest rate method
The effective interest rate method is a method of calculating the amortized cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transactions costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.
g.2) Financial assets at FVTPL
Financial assets are classified as at FVTPL when the financial asset is either held for trading or it is designated as at FVTPL. A financial asset is classified as held for trading if has been acquired principally for the purpose of selling it in the near term. A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if, the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with AFP Provida's documented risk management or investment strategy, and information about the grouping is provided internally on that basis.
Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss.
g.3) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are measured at amortized cost using the effective interest method, less any impairment loss.
Interest income is recognized by applying the effective interest rate, except for short-term receivables when the effect of discounting is immaterial.
AFP Provida has classified as loans and receivables its “Trade and other receivables”. Trade and other receivables are assessed for indicators of impairment at the end of each reporting period. Trade and other receivables are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial
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ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
recognition of the financial asset, the estimated future cash flows of the investment have been affected. Objective evidence of impairment for trade and other receivables could include Provida’s past experience of collecting payments, an increase in the number of delayed payments past the average credit period of 60 days. The amount of the impairment loss recognized is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the financial asset's original effective interest rate.
The carrying amount of trade and other receivables is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in profit or loss.
g.4) Held-to-maturity investments
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity dates that the Group has the positive intent and ability to hold to maturity. Subsequent to initial recognition, held-to-maturity investments are measured at amortized cost using the effective interest method less any impairment. As of December 31, 2013 and 2012, AFP Provida and its subsidiaries do not have any held-to-maturity investments.
g.5) Available-for-sale financial assets
Available-for-sale financial assets are non-derivatives that are either designated as available-for-sale or are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss. Available-for-sale financial assets are stated at fair value and any unrealized gain or loss, except in the case of a significant or prolonged decline in fair value, recognized in other comprehensive income. As of December 31, 2013 and 2012, AFP Provida and its associates do not have any available-for-sale financial assets.
g.6) Derecognition of financial assets
AFP Provida derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another party. If AFP Provida neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, it recognizes its retained interest in the asset and an associated liability for amounts it may have to pay. If it retains substantially all the risks and rewards of ownership of a transferred financial asset, it continues to recognize the financial asset and also recognizes a collateralized borrowing for the proceeds received.
On derecognition of a financial asset, the difference between the asset's carrying amount and the sum of the consideration received and receivable is recognized in profit or loss.
h)
Mandatory investments
The principal financial investment of Provida are mandatory investments which aims to guarantee the minimum return required by law equal to 1% of investment in shares of each pension funds under administration. The mandatory investment requirement is calculated in accordance with instructions issued by the Superintendency of Pensions. Mandatory investments represent approximately 60% and 50% of total consolidated assets as of December 31, 2013 and 2012, respectively.
As established in D.L. 3500, the mandatory investment’s purpose is to provide an actual minimum rate of return over the investment portfolios for each one of the pension funds. This minimum rate of return is based on the weighted average real rate of return of all pension funds of the AFP system, over a 36-month period. This minimum rate of return has been determined based on the different portfolio compositions of each pension fund, so as to those with higher variable income securities and as such subject to higher volatility (Funds Type A and B), require a larger margin to comply with the minimum rate of return. If for a certain month the rate of return of a pension fund would have been lower than the minimum rate of return, the AFP is required to cover the difference within five days of such determination by the Superintendency of Pensions. If mandatory investments are used to fund any deficit in the required level of return,
the AFP must replenish them within fifteen days.
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ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Provida’s management has designated mandatory investments as financial assets at fair value through profit and loss as those financial assets are managed and performance is evaluated on a fair value basis, in accordance with its documented investment and risk management policy, and information about mandatory investments is provided internally on that basis.
i)
Intangible Assets
i.1)
Goodwill
Goodwill is measured as the excess of the sum of the acquisition cost of a business combination, the amount of any non-controlling interests in the acquire, and the acquirer’s previously held equity interest in the acquiree (if any) over the net of the fair value of the identifiable assets acquired and liabilities assumed. Goodwill arising on acquisition of a business is carried at cost as established at the date of acquisition of the business less accumulated impairment losses, if any.
For the purposes of impairment testing, goodwill is allocated to a cash-generating unit that is expected to benefit from the synergies of the combination. A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is indication that the unit may be impaired. The recoverable amount of a cash-generating unit is equal to the higher value between the fair value less costs to sell and its value in use. Value in use is calculated as the discounted value of the cash flows projections and is based on the most recent budgets approved for the next ten years. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment
loss for goodwill is recognized directly in profit or loss. An impairment loss recognized for goodwill is not reversed in subsequent periods.
On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
i.2)
Software licenses
Software licenses acquired are carried at costs (including expenditures incurred to acquire and prepare them for their specific use) less accumulated amortization and accumulated impairment losses. Amortization is recognized on a straight-line basis over their estimated useful lives. The estimated useful life of software licenses is five years. The estimated useful lives and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted on a prospective basis.
i.3)
Intangible assets acquired in a business combination
Intangible assets acquired in a business combination and recognized separately from goodwill are initially recognized at their fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortization and accumulated impairment losses, on the same basis as intangible assets that are acquired separately.
The estimated useful life for customer lists acquired in prior business combinations is twenty years and are amortized on a straight line basis.
i.4)
Derecognition of intangible assets
An intangible asset is derecognized on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from the disposal or derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognized in profit or loss when the asset is derecognized.
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ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
j)
Property, plant and equipment
Items of property, plant and equipment are measured at cost, less accumulated depreciation and impairment losses, if any.
Depreciation is recognized so as to write off the cost less their residual values, using the straight-line method. Land is not depreciated. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, when shorter, the term of the relevant lease.
The useful life of each class of property, plant and equipment, is as follows:
Classes of Property, Plant and Equipment
Years of Useful Life
Buildings:
Tower on Pedro de Valdivia N°100
100
Agustinas N°1,490
60
Agencies
40 - 60
Plant and equipment
10 - 5
IT Equipment
5
Fixed installations and accessories
10
Other property, plant and equipment
5
Repair and maintenance expenditures are recognized in profit or loss when incurred.
An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit or loss.
k)
Impairment of Tangible and Intangible Assets other than Goodwill
At the end of each reporting period, Provida reviews the carrying amount of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired.
If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, Provida estimates the recoverable amount of the cash-generating unit to which the asset belongs.
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately profit or loss, unless the relevant asset is carried at revalued amount, in which case the impairment loss is treated as a revaluation decrease.
When an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.
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ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
l)
Non-current assets and disposal groups held for sale
Non-current assets and disposal groups are classified as held for sale if their carrying value will be recovered mainly through a sale transaction rather than through continuing use. This condition is regarded as met only when the asset (or disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal group) and its sale is highly probable. Management must be committed to the sale, which should be expected to qualify for recognition as completed sale within one year from the date of classification.
When Provida is committed to a sale plan involving loss of control of a subsidiary, all of the assets and liabilities of that subsidiary are classified as held for sale when the criteria described above are met, regardless of whether Provida will retain a non-controlling interest in its former subsidiary after the sale.
When Provida is committed to a sale plan involving disposal of an investment, or a portion of an investment, in an associate, the investment or the portion of the investment that will be disposed of is classified as held for sale when the criteria described above are met, and Provida discontinues the use of the equity method in relation to the portion that is classified a held for sale. Any retained portion of an investment in an associate that has not been classified as held for sale continues to be accounted for using the equity method. Provida discontinues the use of the equity method at the time of disposal when the disposal results in Provida losing significant influence over the associate.
After the disposal takes place, Provida accounts for any retained interest in the associate or joint venture in accordance with IAS 39 unless the retained interest continues to be an associate, in which case Provida uses the equity.
Non-current assets classified as held for sale are measured at their lower of their previous carrying amount and their fair value less costs to sell.
m)
Financial Liabilities
Financial liabilities are classified as either financial liabilities at fair value at profit or loss or other financial liabilities. Provida only has other financial liabilities.
Other financial liabilities (including borrowings and trade and other payables) are initially measured at fair value less any transaction costs. Subsequent to initial recognition, other financial liabilities are measured at their amortized cost, using the effective interest rate method.
The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or (where appropriate) a shorter period, to the net carrying amount on initial recognition.
Provida derecognizes financial liabilities when, and only when, its obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in profit or loss.
n)
Provisions
Provisions are recognized when Provida has a present obligation (legal or constructive) as a result of a past event, it is probable that Provida will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.
The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.
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ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.
n.1)
Provisions for unfavorable casualty rate:
Until June 30, 2009, the AFPs were required by law to purchase insurance policies to provide its participants life and disability coverage. Life and disability insurance is for those participants who, in case of disability or death, do not have sufficient funds in their individual capitalization account to finance their pensions as required by law, whereby the insurance company, contracted by the AFP, covers the difference in case of death. For cases of partial disability, the AFP must have provisions to cover the deficit three years later once the final determination has been made, taking into account the three years of temporary pension payments that the affiliate receives after the initial disability determination was made. Under the Pension Reform Law, and from October 2008, a participant with total disability status will receive immediate payment, once his/her status has
been confirmed by a Medical Commission.
The insurance company makes these calculations at the time of the initial disability determination, three years before it makes the payments to cover the deficit and if required by the final determination, based on information available on that date, including information on rates for life annuities and funds of the participants’ individual capitalization account. If the final determination confirmed the disability status of a participant, the insurance company revises the amount of the initial disability reserve, based on information available at this time.
Towards the end of the 1990’s, Provida observed requirements for additional payments to the insurance company due to an excessive casualty rate reported each year by the insurance company. Provida concluded that, for specific discount rates situations, the estimate made by the insurance company used to provision the amounts for future disability payments underestimated the effective amounts that the Company had to pay.
Regulations of the Superintendency of Pensions do not require AFPs to make additional provisions over those amounts reported by the insurance company unless the AFPs have evidence indicating a higher provision. Provida has developed a casualty rate model to more accurately accrue the amounts that will be required to be paid to disabled participants once the final determination is made. The basic assumption of the casualty model is to use its best estimate at the time of the initial disability determination, using the information it believes will be applicable as to payment (final determination). The variables associated with the model are: disability status, rate of return of pension funds over the three years of the temporarily disabled period, and interest rate prevailing at the moment of payment (expected rate). This estimate differs from that used by insurance companies which only use information relating to the disabled
status of participants at the time of the initial determination (that is, three years before payments).
Therefore, over the term of an insurance contract, the Company measures and accrues the expected cost to the insurer. In fact, through the application of the casualty rate model, the provisions made by Provida with respect to future premium payments to be made to the insurer reflects more accurately the effective payments that it will have to make, so there is a higher correlation between its revenues and expenses for a specific period. The information for the casualty rate model is reviewed monthly, making any modification considered appropriate at that moment.
According to the accounting policy applied by Provida, if the casualty rate calculated by the model is higher than the casualty rate calculated and maintained by the insurance company, then the amounts calculated by Provida’s model are used. On the contrary, if the casualty rate calculated by the model is lower than the one calculated by the insurance company, then the amount calculated by the insurance company will be provisioned, which is considered to be the minimum amount under existing regulation.
In view of the lower rates used in the casualty rate model to discount disability payments with regard to the rates used by the insurance company, the casualty rate calculated by the model is higher than the one used by the insurance company. Therefore, as of December 31, 2013, 2012 and 2011, Provida has recorded a higher expense than the one determined by the insurance company because it believes the amount calculated by the model is the best estimate of the fair value of the obligation.
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ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
n.2)
Provisions for Employee Benefits
Short-term employee benefits – Short-term benefits include wages, employee vacations, profit-sharing and bonuses that are expected to be completely settle before twelve months after the end of the reporting period in which the employees render the related service. Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid under profit-sharing plans if the Company has a present legal or constructive obligation to pay this amount as a result of a past service provided by the employee and the obligation can be estimated reliably.
Other long-term employee benefits – All employees are entitled to receive years of service award starting with the 5th year employment anniversary and each five years thereafter, up to 30 years. This award is paid in the month when the employee celebrates his/her corresponding employment anniversary. Provida’s net obligation in respect of long-term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. The calculation is performed using the projected unit credit method. Any actuarial gains or losses are recognized in profit or loss in the period in which they arise.
Long-term Incentive (LTI) - The General Shareholders’ meeting of BBVA Bank (controlling parent company as of that date) held in Spain on March 13, 2009, approved a Multi-Year Variable Retribution Program of Shares for members of the BBVA Group’s directorship team (“the Program”) which includes several executives of AFP Provida. The Program became effective on April 15, 2009. Liquidation for the LTI 2009-2010 took place on April 15, 2011. There is no LTI Program effective at the end of the reporting period.
Provida has not granted any post-employment benefits to its employees.
o)
Contingent liabilities and contingent assets
A contingent liability is a possible obligation that arises from past events, and whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of Provida; or are present obligations that arise from past events but are not recognized because it is not probable that an outflow of resources embodying economic benefits will be require to settle the obligation; or the amount of the obligation cannot be measured with sufficient reliability. Contingent liabilities are not recognized in the financial statements; they are only disclosed in the notes, unless the possibility of an outflow of resources embodying economic benefits is remote.
A contingent asset is a possible asset that arises from past events, and whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of Provida. Contingent assets are not recognized in the financial statements but must be disclosed where an inflow of economic benefits is probable.
p)
Current taxes and deferred taxes
p.1)
Current Tax
Provida recognizes a provision for current income taxes based on its taxable profit for the year which is determined using current tax regulations and calculated using the enacted tax rate of 20% at the end of the reporting period.
Current tax for current and prior periods, to the extent unpaid, is recognized as a liability. If the amount already paid in respect of current and prior periods exceeds the amount due for those periods, the excess is recognized as an asset. The benefit relating to a tax loss that can be carried back to recover current tax of a previous period shall be recognized as a deferred tax asset.
p.2)
Deferred taxes
Deferred taxes are recognized on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are recognized for all temporary taxable differences, and deferred tax assets are recognized for all
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ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Deferred tax assets and liabilities are not recognized if the temporary differences arise from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries and associates, and interest in joint ventures, except where AFP Provida is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future.
The carrying amount of the deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax assets and liabilities reflects the tax consequences that would follow from the manner in which Provida expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.
Deferred tax assets and liabilities are offset when AFP Provida has a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred tax assets and liabilities relate to income taxes levied by the same taxation and intends to settle current tax liabilities and assets on a net basis.
p.3)
Current and deferred tax for the year
Current and deferred tax are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognized in other comprehensive income or directly in equity respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination.
Income tax expense represents the sum of the tax currently payable and deferred tax.
q)
Minimum dividend
The policy of dividends includes the obligation, which will be accrued at the end of each reporting period, when the amount of interim dividends paid against profit for the year is less than the minimum dividend established in the dividend policy approved during the General Shareholders’ meeting. The difference will be accrued as a dividend payable.
r)
Earnings per share
Basic earnings per share are calculated by dividing net profit (loss) attributable to ordinary equity holders of the parent (the numerator) by the weighted average number of ordinary shares outstanding (the denominator) during the period. For all periods presented, Provida did not engage in any transactions that have potential dilutive effects leading to diluted earnings per share that could differ from basic earnings per share.
s)
Revenue recognition
Fee income from the Pension Funds’ administration is recognized when all activities relating to administration have been completed. Fee income is not recognized for the Pension Funds’ individual account administration until participants’ contributions have been accredited.
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ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
t)
Information on Capital
Due to the nature of the pension business and its leadership within the industry, Provida has significant and sufficient cash flows from fees received from mandatory and voluntary pension savings, allowing it to finance
business-related expenses such as employee salaries, administration expenses and life and disability insurance expenses. The company uses cash flows generated by operations in order to increase mandatory investments held and payment of dividends, as well as for short term debt obligations, when necessary. These sources of funds have been sufficient to finance the aforementioned requirements, and additional capital requirements are not foreseen in the near term.
Capital regulatory requirements state that AFPs must have a minimum equity expressed in Unidades de Fomento or “U.F.” (inflation-indexed unit of account) according to the number of participants an AFP has at the reporting date of the financial statements, as shown in the following table:
Number of participants
Number of U.F. required
Less than 5,000
5,000
5,000 – 7,499
10,000
7,500 – 9,999
15,000
10,000 or more
20,000
Since its incorporation, Provida has fully complied with the minimum equity requirement.
As of December 31, 2013 and 2012, its equity expressed in U.F. was 7,020,584 and 11,085,767, respectively.
u)
Risk Management Policy
Provida’s results of operations and future financial position are exposed to foreign currency, interest rate, minimum return requirement (mandatory investments) and life and disability insurance long term obligations risks. During the normal course of business, Provida manages its risk exposure of its operating and investing activities as follows:
u.1.
Foreign currency exchange risk
As a result of the disposal of its investees in Mexico (AFORE Bancomer) and Peru (AFP Horizonte) at the beginning of the year 2013, Provida is only exposed to foreign currency exchange rate risks through its Ecuadorian wholly-owned subsidiary, AFP Genesis, which as of December 31, 2013 has contributed MCh$501 in profits through consolidation.
The appreciation/depreciation of the US Dollar (functional currency of AFP Genesis) with respect to the Chilean Peso could adversely/positively affect revenues and expenses recognized by Provida through consolidation, and hence, its net profit or loss.
For the year ended December 31, 2013, the exposure to the foreign currency exchange risk has significantly decreased with respect to previous periods due to the disposal of foreign operations as mentioned in preceding paragraphs.
u.2.
Interest rate risk
For working capital requirements purposes, Provida might be exposed to non-significant interest rate risks resulting from financing through credit lines. Current leasing obligations are not subject to interest rate risk since the rates included in the terms of the contracts are fixed.
u.3.
Mandatory investments
Provida’s principal financial investment is in mandatory investments, constituted by law and equivalent to 1% of pension funds under administration. Provida must keep this 1% invested in shares (units) of each one of the funds under management. Mandatory investments represented 62.9% and 53.2% of total assets under management of
F-29
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Provida as of December 31, 2013 and December 31, 2012 respectively, and, in view of the volatility observed in local and foreign markets where pension funds are invested, the future gains or losses on mandatory investments expose Provida to certain risks to the stability of its net income.
It is important to mention that mandatory investments are constituted with the purpose of compensating participants in case Provida cannot meet the legal requirement of minimum returns, thus, adversely affecting the net assets of the AFP if this occurred, since it must additionally replenish the 1% reserve with its own resources. Minimum return is calculated in terms of the weighted average returns of the pension fund industry for rolling periods of 36 months.
The risks described above are associated with Provida’s fund management, governed by the objective to optimize the return of each one of the funds for a specific risk level or else to minimize the risk level in order to obtain an acceptable level of profit.
In order to fulfill the foregoing, Provida has a risk management policy that defines the activities and criteria it applies to efficiently identify, measure, control and manage the risks associated to fund management. Hence, Provida manages the fund equities according to internal credit risk limits, analyzing expected losses and applying market risk measurements. The latter refers to absolute value-at-risk (VaR) which measures the probable impact on the different types of funds in case of adverse shocks of instrument prices (fixed income, currencies and variable income). Furthermore, in order to ensure the Company’s solvency, ensure future benefit payments and compliance with minimum return requirements, Provida applies relative VaR over diverging positions between each fund and the system’s model portfolio.
Absolute and Relative VaR by type of fund as of December 31, 2013 and 2012 was as follows:
Type of Fund
Relative VaR
Absolute VaR
Absolute VaR in MCh$
2013
2012
2013
2012
2013
2012
A
0.092%
0.294%
4.060%
3.186%
135,224.79
99,445.05
B
0.115%
0.287%
3.172%
2.305%
120,158.01
84,508.22
C
0.114%
0.253%
2.257%
1.611%
227,369.24
153,588.34
D
0.174%
0.178%
1.266%
0.917%
54,323.29
34,815.45
E
0.220%
0.213%
0.591%
0.511%
12,164.23
8,190.33
Additionally the Company makes monthly measurements of minimum returns that are presented to the Board of Directors Meeting. The calculation made under regulations of the Superintendency of Pensions presented at the end of 2013 and 2012 were the following:
Fund
Type A
Fund
Type B
Fund
Type C
Fund
Type D
Fund
Type E
2013
2012
2013
2012
2013
2012
2013
2012
2013
2012
Average Returns
0.34%
1.86%
0.47%
2.75%
1.80%
3.41%
3.09%
3.79%
4.22%
4.87%
Method -4% (-2%) (1)
-3.66%
-2.14%
-3.53%
-1.25%
-0.20%
1.41%
1.09%
1.79%
2.22%
2.87%
Method 50% (2)
0.17%
0.93%
0.24%
1.37%
0.90%
1.70%
1.54%
1.89%
2.11%
2.43%
Minimum Return
-3.66%
-2.14%
-3.53%
-1.25%
-0.20%
1.41%
1.09%
1.79%
2.11%
2.43%
Provida’s Return
0.02%
1.63%
0.18%
2.53%
1.57%
3.08%
3.04%
3.61%
4.17%
4.51%
Provida’s excess over minimum return
3.68%
3.77%
3.71%
3.78%
1.77%
1.67%
1.95%
1.82%
2.06%
2.08%
Ranking minimum return
5
4
5
4
5
5
5
4
3
4
Initial date measurement
Dec-10
Dec-09
Dec-10
Dec-09
Dec-10
Dec-09
Dec-10
Dec-09
Dec-10
Dec-09
Final date measurement
Dec-13
Dec-12
Dec-13
Dec-12
Dec-13
Dec-12
Dec-13
Dec-12
Dec-13
Dec-12
Number of months
36
36
36
36
36
36
36
36
36
36
(1)
The annualized real average return for the last 36 months of all funds of the same type, as appropriate, minus 4% (fund Types A and B) and minus 2% (fund Types C, D and E)
(2)
The annualized real average return for the last 36 months of all fund of the same type, as appropriate, minus the absolute value of 50% of such return.
F-30
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
VaR methodology
The Risk Division performs daily monitoring of the risks associated with investments in the various Funds. The approach is carried out by using the Parametric VaR methodology and assuming a normal distribution of asset returns.
The VaR model to the market risk measurement provides a maximum loss with a probability level that may occur in the market positions during a certain period of time.
Two risk measurements are carried out: Absolute VaR and Relative VaR. The Absolute VaR measures the market risk of the Funds that directly impacts the value of the Fund's shares. Moreover, the Relative VaR measures the market risk of a particular Fund over the same Fund of the Benchmark comprised of a weighted average from the rest of AFPs within the Chilean Pension System.
Given the assumption of normality, the approach of covariance matrix VaR is used, through which the future performance of the market variables is expressed through a group of volatilities (reflecting the amount of relative changes in the market variables) and correlations (indicating the degree of compensation of these variations among them), which were obtained from an analysis of the historical performance of such variables.
Particularly, the model is implemented daily by using the exponential smoothing methodology with a parameter of 0.925 in the construction of the covariance matrix. The latest 100 results of returns are used for the calculation. Finally, a 99% confidence level and a monthly loss horizon are established.
Additionally, we performed a sensitivity analysis of the potential impacts that may result from movements in the positions, given the latest information of the market variables, that is, underlying variances and correlations. In this way, positions with large risk in the managed portfolios can be managed.
Limitations of the sensitivity analysis
The model has two potential limitations. The first limitation comes from the assumption that the asset returns follow a normal distribution, which is not always the case. The second limitation relates to the measurement of the relative risk due to the Benchmark’s inference, since the information of the positions held by the AFPs is only known once a month and with an average of 11 days of delay, and in order to estimate the relative risk during each day, assumptions about the positions of the Benchmark must be made.
u.4. Life and disability benefits
Life and disability insurance is a long-term obligation, given that the benefit to disabled participants is granted three years after the first ruling of disability, in the case of partial disability (50% to two thirds of loss of working capacities), and in total disability (more than two thirds of loss of capacities).
In quantitative terms, the AFP must cover the payment deficit equivalent to the difference between the affiliate’s savings in his individual capitalization account and benefits established by law. These benefits correspond to the present value of a life annuity (equivalent to 50% or 70% of the average taxable income salary of the affiliate during the last ten years) discounted by the life annuity rates prevailing at the time of payment. Subsequently, the evolution of such interest rates impacts the final value of the payment of the obligation by AFP Provida.
One of the changes introduced by the Pension Reform was the elimination of the individual responsibility of the AFPs regarding life and disability insurance benefits. Hence, starting July 1, 2009, a number of insurance companies were awarded the management of life and disability insurance for a 12-month period. Consequently, AFP Provida now holds the right to, for the concept of life and disability insurance, the obligation of claims pending of payment for the period of temporary disability, with the contract currently in run-off. The insurance contract is under a settlement process.
F-31
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Additionally, in terms of life and disability insurance business, regulation stipulates that the reserves for claims be evaluated at market rate instead of historical rates (minimum of the previous semester), opening up a legal window for insurance companies to voluntarily apply said methodology to old contracts. BBVA Life Insurance, upon request from AFP Provida, resorted to this new regulation since, by doing so, the value of its liabilities would be closer to the actual amount at the time of payment (fair value). Furthermore, upon mutual agreement of the parties (prior to compensation to the insurance company due to the change in conditions), the AFP’s financial performance for its cash surpluses was modified, with a benchmark determined by assets with a similar duration to the liabilities of the insurance.
In light of the changes made in the assets and liabilities management associated with life and disability insurance, AFP Provida has mitigated the risk associated to changes in the interest rate.
NOTE 5.
CASH AND CASH EQUIVALENTS
a)
Cash and cash equivalents
As of December 31, 2013 and 2012, cash and cash equivalents was MCh$45,029 and MCh$41,245, respectively, and is detailed as follows:
Time deposits have a maturity of less than three months from the date of acquisition.
There are no amounts of cash and cash equivalents held by Provida that are not available for its use.
Cash flows from disposal of foreign associates:
On January 9 and March 4, 2013, Provida received proceeds of MCh$61.323 (U.S.$130 million) and MCh$31,972 (U.S.$70 million), respectively from the sale of its foreign associates, the Mexican entity AFORE Bancomer (equity interest owned of 7.50%) and the Peruvian entity AFP Horizonte (equity interest owned of 15.87%), respectively.
NOTE 6.
MANDATORY INVESTMENTS
In order to ensure minimum return requirement of the pension funds, as referred to in article 37 of D.L. 3,500 of 1980, and in compliance with article 40 of the same law, the Administrator must hold an asset known as Mandatory Investment in each Fund type administered, equivalent to 1% of each pension fund equity, which must be invested in shares of the corresponding pension fund.
For all periods presented the Company has complied with the minimum mandatory investment requirement.
F-32
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Fees for mandatory contributions and APV (Variable fee)
159,268
150,643
137,664
Fees for programmed withdrawals and temporary income (Variable fee)
2,952
2,772
2,695
Total
162,220
153,415
140,359
F-33
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
b. Fees receivable
As of December 31, 2013 and December 31, 2012, fees receivable included in line item “Trade and Other Receivables” (see Note 8) comprised the following amounts:
(*) It includes MCh$30 in 2013 and MCh$103 in 2012 corresponding to regularization contributions made by the Company in Pension Funds in order to regularize mistakes in the individual accounts of participants.
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10.
BALANCES AND TRANSACTIONS WITH RELATED ENTITIES
Until September 30, 2013, the controlling shareholder of AFP Provida was BBVA Inversiones Chile S.A., a subsidiary of the Spanish entity “Banco Bilbao Vizcaya Argentaria”, thus all transactions at that date with BBVA Group’s entities were considered transactions with related parties. Beginning on October 1, 2013, MetLife, Inc., a New York Stock Exchange listed company duly incorporated in accordance with the laws of the State of Delaware in the United States of America, became its ultimate parent of the Company. Receivable and payable balances with BBVA entities as of December 31, 2013 were reclassified as trade and other receivables and trade and other payables, respectively. Balances
and transactions disclosed as of December 31, 2012 were not reclassified, as they were properly considered at that date as transactions and balances with related parties.
Consequently, from that date onwards, all transactions made with the entities that are globally part of the MetLife Group are considered as transactions with related parties of AFP Provida.
a. Accounts receivable from related entities
As of December 31, 2013 and 2012, the balance of accounts receivable from related entities is sets forth in table below:
For all periods presented, no guarantees has been given or received nor has any allowance for doubtful accounts been recorded in respect of accounts receivables from related parties.
b. Accounts payable to related entities
As of December 31, 2013 and 2012, the balance of accounts payable to related entities is sets forth in table below:
Description of transactions with related parties for the period ended December 31, 2013, 2012 and 2011:
F-37
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Servicios de Administración Previsional S.A.: This associate renders services to Provida for electronic collection, password administration, data processing, data transference and technological services.
Sociedad Administradora de Fondos de Cesantía de Chile S.A. (AFC Chile): Provida records revenues from AFC Chile (Unemployment Fund) for rendering technological support and technological advisory services.
The AFPs as a consortium provided to AFC Chile a joint and indivisible guarantee of UF 400,000. This guarantee, in accordance with Provida’s equity interest of 49.2% in AFC Chile amounts to MCh$4,544 or approximately MUS$9 and it was given in order to guarantee AFC Chile’s obligations. The maturity date of the guarantee was April 25, 2013.
On February 4, 2010, AFC Chile reimbursed Provida with bank guarantee letters for UF 160,000 (MCh$3,730). On March 26, 2013, AFC Chile settle its obligations to the Bank issuer of the guarantee letters for a total of UF 240,000 (MCh$5,594) releasing Provida as warrantor and joint co-signer.
The contract with AFC Chile ended on October 7, 2013. On that same date, AFC Chile began a process of liquidation. At the Extraordinary Shareholders meeting held on November 7, 2013, a liquidation commission of four members was designated to complete such process which will be finalized in a period that shall not exceed three years. The entire liquidation process will be overseen and the final authorization to liquidate AFC Chile will be granted by the Superintendency of Pensions.
MetLife Chile Seguros de Vida S.A. provides health insurance policies to certain Provida’s employees.
As a result of the change of the parent company of AFP Provida, the following entities were considered related entities until September 30, 2013:
BBVA Inversiones Chile S.A.
Transactions with this entity refer to:
·
Service rendering contract entered into on December 27, 2006 regarding transactional services through self-serving dispensers that include issuance of certificates about contributions, affiliations, balance sheets and others, amounting to MCh$80, MCh$107 and MCh$114 as of September 30, 2013 and December 31, 2012 and 2011, respectively.
·
Lease contracts regarding rentals of square meters in Provida’s branch offices to install self-serving dispensers for a total amounting to MCh$0, MCh$1 and MCh$1 as of September 30, 2013 and December 31, 2012 and 2011, respectively.
·
Software license contract entered into on December 1, 2005 and new contract in 2010, corresponding to intellectual property rights related to the use, as well as, instructions for use and functionality, of software implemented on different operating and administrative processes, amounting to MCh$2,832 as of September 30, 2013, MCh$2,832 as of December 31, 2012 and MCh$2,832 as of December 31, 2011.
F-38
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Contract entered into on December 29, 2004 for data processing corresponding to operating and administrative applications. This service is rendered by the regional computing center (CCR). The outstanding balances of MCh$1,225 as of September 30, 2013; MCh$1,481 as of December 31, 2012 and MCh$1,428 as of December 31, 2011 were included in the “Miscellaneous other operating expenses” line item.
BBVA Corredores de Bolsa S.A.: Transactions with this entity related to financial services rendered to Provida.
BBVA Chile S.A.: Transactions with this entity related to rental contracts, collection services, pension payments and saving withdrawals, lines of credit, loans and current accounts.
BBVA Compañía de Seguros de Vida S.A.: On January 1, 2005, BBVA Compañía de Seguros de Vida S.A. was awarded the bid for Provida’s L&D insurance for a coverage period to June 30, 2009.
Aplica Soluciones Tecnológicas Chile Ltda.: Contract dated January 4, 2010, corresponded to design and development services of the software systems, amounting to MCh$713 as of September 30, 2013, MCh$655 as of December 31, 2012 and MCh$412 as of December 31, 2011.During 2013, 2012 and 2011, enhancements for new projects were incorporated amounting to MCh$57, MCh$243 and MCh$279 respectively.
BBVA Servicios Corporativos Limitada: Contract dated January 1, 2010 for outsourcing the Company’s services. The contract will last for 10 years and is renewable for 10-year periods.
Banco Bilbao Vizcaya Argentaria S.A.: Contract dated December 16, 2009 corresponding to rendering computing services, including consultancy server maintenance, and a help desk.
d. Board of Directors and key management personnel:
d.1 Accounts receivable and payable and other transactions
There are no outstanding amounts receivables or payable between Provida and the members of the Board of Directors and key management personnel. No guarantees have been given or received from directors or key management personnel. No other transactions have been performed between Provida and the members of the Board of Directors and key management personnel.
In 2013, key management personnel consisted of 60 executives, which included 23 managers, 17 deputy managers and 20 department chiefs. In 2012, key management personnel consisted of 49 executives in which included 23 managers, 13 deputy managers and 13 department chiefs. In 2011, key management personnel consisted of 47 executives in which included 21 managers, 7 deputy managers and 19 department chiefs.
F-39
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
d.3 Compensation of Board of Directors and Directors’ Committee
Compensation of the Board of Directors for the years ended December 31, 2013, 2012 and 2011, presented in line item “Miscellaneous other operating expenses” was as follows:
(*) Includes per diem and fees of former members of the Board Directors elected under BBVA controlling period.
On October 1, 2013, MetLife, Inc. became the ultimate parent of AFP Provida. Consequently, members of the Board of Directors elected under BBVA controlling period, Messrs. Joaquin Cortez Huerta, Jesus del Pino Durán, Luis Fernando Ferreres Crespo, Francesc Jorda Carré and José Martos Vallecillos, members of the Board of Directors resigned their positions.
At the Board of Directors’ meeting held on October 2, 2013, Messrs. Victor Hassi Sabal, Jorge Carey Tagle, Jaime Martínez Tejeda, Carlos Alberto Olivieri and Martín Enrique Galli were appointed as Provida’s new members of the Board of Directors.
As of December 31, 2013, the Board of Directors was composed of as follows:
Name of Directors
Position
Victor Hassi Sabal
Chairman
Jorge Carey Tagle
Vice-Chairman
Jaime Martínez Tejeda
Director
Carlos Alberto Olivieri
Director
Martín Enrique Galli
Director
María Cristina Bitar Maluk
Director
Jorge Marshall Rivera
Director
Osvaldo Puccio Huidobro
Alternate Director
Directors’ Committee:
According to Law 19,075 published on December 20, 2000, and Circular N°1,956 of the Superintendency of Securities and Insurance published on February 19, 2001, Provida formed a Directors’ Committee which replaced the previous Audit Committee in its faculties and functions.
F-40
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In compliance with Article 33 of Corporate Law N°18,046, fees of the Board members and Directors’ committee members are set up annually at the Ordinary Shareholders’ meeting. The amounts approved for regular board, extraordinary and directors’ committee meetings were established as follows:
(*) Members of the Board of Directors until October 2, 2013.
NOTE 11.
INCOME TAX
a) The following tables represent, respectively, detail of the credits available to the Company as represented by primarily monthly payments made to the tax authorities, and the detail of amounts due to the tax authorities, including a break-out of deductions and additions as well as amounts due in foreign jurisdictions
The amounts in the tables above are presented in the consolidated statement of financial position resulting in a current tax asset of MCh$5,432 and a current tax liability of MCh$5,279 as of December 31, 2013 and a current tax liability of MCh$3,078 as of December 31, 2012.
F-41
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
b) Deferred taxes
Deferred taxes recognized for deductible and taxable temporary differences as of December 31, 2013 and 2012 are as follows:
Deferred tax relating to revaluation of mandatory investments
-
-
28,362
25,364
Deferred tax relating to AFORE Bancomer
-
2,545
-
-
Deferred tax relating to AFP Horizonte
-
(1,080
)
-
-
Deferred taxes relating to other temporary differences
-
-
221
99
Total
-
1,465
33,795
32,520
Deferred tax assets have been recognized to the extent that it is probable that sufficient taxable profits will be available against which the deductible temporary differences can be utilized. Management of Provida considers that sufficient taxable profits will be available to be utilized.
b.1) Movements in deferred taxes
The following table sets forth the changes in deferred taxes in the consolidated statement of financial position as of December 31, 2013 and December 31, 2012.
On July 31, 2010, Law 20,455 was published in order to finance the country’s reconstruction, after the earthquake occurred on February 27, 2010, by temporarily increasing the tax rate at 20% for the commercial year 2011, then decreasing to a 18.5% tax rate for the commercial year 2012 and returning back to a 17% tax rate in commercial year 2013. However, on September 27, 2012, Law 20,630 was published regarding the Tax Reform Law that increased the first category tax rate to 20% from the commercial year 2012 onwards.
F-43
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12.
LIFE AND DISABILITY INSURANCE
a) Financing life and disability pensions.
Before the Pension Reform Law was amended, and according to provisions established by law, Provida had individually contracted insurance to cover its obligation to provide its participants life and disability benefits.
The Pension Reform Law eliminated the individual responsibility that AFPs had with life and disability insurance by establishing that all AFPs in conjunction should contract, through a public bidding, a fixed, single-premium insurance to cover this obligation. The insurance is awarded to one or more insurance companies offering the best economic offer, awarding the insurance to more than one insurer in order to avoid excessive concentration and cover the entire life and disability insurance risk with the same value for all workers. This obligation is paid by the employer and became effective on July 1, 2009, with a temporary grace period for employers with fewer than 100 employees that ended in June 2011. Commencing on July 1, 2011, this
obligation is paid by the employer regardless of the number of employees.
The first bidding process was for a 12-month-period and the premium paid until June 30, 2010 was 1.87% over the taxable salaries of workers. The insurance companies that were awarded the bid were as follows:
INSURANCE COMPANIES
Interamericana Seguros de Vida S.A.
RBS (Chile) Seguros de Vida S.A.
Chilena Consolidada Seguros de Vida S.A.
BBVA Seguros de Vida S.A.
Ohio National Seguros de Vida S.A.
From July 1, 2010, and for a 24-month period until June 2012, the premium paid was 1.49% over the taxable salaries of workers. The insurance companies that were awarded the bid were as follows:
INSURANCE COMPANIES
BBVA Seguros de Vida S.A.
Ohio National Seguros de Vida S.A
Compañía de Seguros de Vida Cámara S.A.
Interamericana Seguros de Vida S.A.
Banchile Seguros de Vida S.A. and Euroamerica Seguros de Vida S.A. (co-insurance)
Compañía de Seguros Cruz del Sur S.A. and Seguros Vida Security Previsión S.A. (co-insurance)
Valora Compañía de Seguros de Vida S.A
Finally, beginning on July 1, 2012, and for a 24-month period, until June 2014 the average premium is 1.26% over the taxable salaries of workers. The insurance companies that were awarded the bid were as follows:
INSURANCE COMPANIES
Chilena Consolidada Seguros de Vida S.A.
CN Life Compañía de Seguros de Vida S.A.
Seguros Vida Security Previsión S.A. and Penta Vida Cía. de Seguros de Vida S.A. in co-insurance with Bice Vida Compañía de Seguros de Vida S.A.
Insurance coverage is effective in case the participant dies or becomes disabled before the legal retirement age (65 for men and 60 for women starting October 2008) or when he/she has not accumulated sufficient funds in his/her individual capitalization account to finance the benefit payments as established by law, whether for him/her or his/her legal beneficiaries.
In addition, according to law, temporary disabled pensions awarded to under first ruling of the medical commission are also covered by the insurance.
F-44
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The additional contribution that the insurance must cover, if necessary, is equivalent to the resulting deficit between the funds necessary to finance life and disability insurance pensions and the funds accumulated per participant, including his/her recognition bond, to the occurrence date of the claim.
It is important to note that, even though Provida does not have individual contracts with prevailing coverage, as a result of the regulatory requirements for temporary disability which state that payments of disability claims can be made effectively three years after first ruling disability is confirmed by a final ruling of a medical commission, there is one contract described below that is still in run-off where its final settlement is under process.
Until June 2009, according to legal regulations, Provida contracted insurance that fully covers temporary pensions of participants declared disabled in a first ruling, the additional contribution and the contribution (contributions made during the disabled period in case disability is not ratified in a second ruling). These contracts do not preclude Provida’s responsibility and obligation to deposit such additional contribution, pay temporary pensions required to in the first ruling, administer contributions of individual capitalization accounts and make additional contributions to individual capitalization accounts of the participant when appropriate.
Regarding the contract in force until June 2009, during the first quarter of each year, Provida and the insurance company compare payments made by Provida in the previous fiscal year for temporary premiums (the “temporary premium”) and pre-settlements and the sum of (i) the effective amounts paid by the insurer to the participants or their beneficiaries (“Temporary pensions and contributions”) and (ii) the amount estimated by the insurer (“technical reserves”) required to pay disabled participants once the final rulings or disabled status are declared by the Medical Commission (the sum of (i) and (ii) is referred to as “total cost of casualties”). Additionally, the casualty rate corresponds to the ratio of the total cost of casualties over the taxable salary of contributors. If the cost of casualties is higher
than temporary payments, Provida must pay the insurance company the difference up to a maximum limit established in the insurance contract, based on the maximum casualty rate. Provida has no obligation to pay casualties exceeding the maximum rate. However, if the insurer is not able to pay the benefits to the participants, Provida would be responsible for such payments.
The last disability and survival insurance with effective coverage from January 1, 2005 to June 30, 2009 was entered into with BBVA Seguros de Vida S.A. (related company, see Note 12). The initial contract's maximum casualty rate was 1.27% expressed as a percentage of the contributing participants’ taxable remuneration, with a monthly premium paid throughout the coverage period of the contract at a temporary premium rate of 0.70%. Provida’s participation over the surplus was 100% if the casualty rate was equal to or lower than the contract’s maximum casualty
rate over the contributing participants’ taxable salary. Additionally, the contract established monthly payments calculated at a provisional rate of 0.70% applied to the total of remuneration and monthly taxable salary of the participants on a one-month lag plus a monthly fixed premium of UF 2,150 during the coverage period of the contract. As a result of regulatory update of the mortality tables as well as the impact in the higher casualty costs upon mutual consent of the parties, in view of the changes in the economic conditions of the contract, the parameters of the insurance contract were modified. Beginning
in January 2008, the maximum casualty rate was 1.70% expressed as a percentage of the contributing participants’ taxable remuneration, while the temporary rate was 1.00%, retaining the monthly fixed premium of UF 2,150 (MCh$50 approximately).
The aforementioned insurance contract also contemplates annual true-ups for the difference between all payments made by Provida (temporary premium and previous true-ups and the total cost of casualties (paid or accrued by the insurer), at the end of each year and which has been taking place on March 31 of each year from 2006 onwards. On the same date, monthly financial revenues will be paid, based on the value recorded to December 31 of the previous year, resulting from applying the rate of return established in the contract over the surplus of cash flow maintained by the insurer (total payments made by Provida less casualties paid by the insurer).
On July 1, 2009, BBVA Seguros de Vida adopted General Rule No.243, allowing it to voluntarily determine the casualties’ reserves at a market interest rate on a monthly basis. Consequently and given the impact of such determination over the administration of the insurance contract and its associated risks, the parties, by common agreement, modified the conditions of the financial revenues. The above considering that providing the life and disability insurance implies a mismatch in the risk between the assets and liabilities generated by such obligation and, that the conditions of the contract
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
could be modified by any of the parties if new regulations are enacted with requirements affecting the contract, as actually occurred.
The final settlement of this contract may occur 48 months after the expiration date of the coverage period which is June 30, 2013. Currently, Provida and BBVA Seguros de Vida are still in the final process of analysis of the final balance of such insurance policy.
The previous insurance policy for life and disability coverage was effective from August 1, 2003 to December 31, 2004 and entered into with BBVA Seguros de Vida S.A. The premium had a maximum rate of 1.10% expressed as a percentage of the contributing participants’ taxable remuneration, with monthly premium paid throughout the contract’s duration at a temporary premium rate of 0.70%. Provida’s participation in the surplus was 100% if the casualty rate was equal to or lower than 1.10% and greater than 0.85% of the participants’ taxable remuneration. If the casualty rate was equal to or less than 0.85%, Provida had the right to an additional participation in 90% of the surplus. Additionally, the contract
established monthly payments calculated at a provisional rate of 0.70% applied to the total of remuneration and monthly taxable salary of the participants on a one-month lag plus a monthly fixed premium of UF 2,150 (MCh$50 approximately) for the contract coverage period. The contract's annual true-ups took place on March 31 of each year beginning in 2005. The date of the final settlement of this contract was originally December 31, 2008, but was extended by common agreement of the parties and, settled in April 2011.
c. Effect on Profit (Loss)
The net effect on profit (loss) for the life and disability insurance includes the premium expenses included in line item “Life and Disability Insurance Premium expense" and revenues from settlements for favorable casualty rate and monthly financial revenues that are presented under the line item “Other revenues” within the consolidated statement of comprehensive income.
The net composition of annual expense for life and disability insurance for the years ended December 31, 2013, 2012 and 2011 is detailed as follows:
Life and disability insurance premiums annual expense
155
329
370
Favorable (unfavorable) adjustments due to casualty rate
1,940
(4,047
)
(2,696
)
Life and disability insurance premium
2,095
(3,718
)
(2,326
)
Financial income (Note 7 c.)
(228
)
(953
)
(2,151
)
Total life and disability insurance income (expense), net
1,867
(4,671
)
(4,477
)
Since January 1, 2004, in relation to casualty adjustments, Provida has implemented its “casualty model” by evaluating actual data regarding claims and reserves according to the expected parameters such as discount rate, final amount of recognition bond, pension funds’ return, in addition to other considerations at the moment of the effective payments of casualties claims. In this regard, the accounting criterion establishes if the amount of casualty rate calculated by the model were less than the cost calculated and registered by the insurance company, by law, this last amount will be accrued according to the current regulation. On the contrary, if the casualty rate calculated by the model were higher than those established in the insurer’s balance, the amount to be provisioned would be the cost determined by the model.
BBVA Seguros de Vida adopted a new regulation effective on July 1, 2009, permitting the insurers to apply the market interest rate on a monthly basis to evaluate their casualties’ reserves for those life and disability contracts with a coverage period expiring before June 30, 2009. Consequently, this resulted in a decrease in the amount of reserves, since they were determined using historical rates that, according to law, would be the minimum rate from the prior semester, which were lower than those rates used for life and disability annuities prevailing in the market.
Regarding the casualty provisions and considering that the insurance policy maintained with BBVA Seguros de Vida S.A. will be settled, Provida deemed it necessary as of December 31, 2013 to constitute a higher provision than the
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
provision estimated by the insurance company taking into account the death fees’ claims payment incurred but not reported related to survival benefit claims to be provided where a deceased participant had a spouse and/or beneficiaries entitled to receive the survival benefits in accordance with current regulations.
Likewise, on applying the methodology of its casualty model, Provida concluded that life and disability rates for annuities would be at lower average levels than the prevailing market interest rate as of June 2011, which is the interest rate used by the Insurer to value the reserves for casualties. However, due to a higher speed of payments of casualty claims than typically recorded by using the casualty model, and the fact that average forward rates applied were higher for the period than anticipated, and the rate used to pay such claims was lower than the rate provisioned, Provida made a reversal of provisions determined by the difference between the amount required as of December 2011 and the effective amount, with the best available information, as of December 31, 2012. As of December 31, 2011, since the average forward rates at the
close of December 2010 were lower than the expected forward rates for December 2011, Provida also made a reversal of provisions determined by the difference between the amounts required as of December 2010 with the best available information as of December 31, 2011.
d. Liabilities arising from additional contributions
d.1 Collection to be cleared
Until 1987, the Company had collected additional contributions designated to finance the life and disability pension system fund. In this process, there were liabilities which amounted to MCh$368 and MCh$301 as of December 31, 2013 and December 31, 2012 respectively. These liabilities are recorded under “Collections to be cleared” within line item “Trade and other payables” (Note 21).
Contributions of workers not identified in the participants' master file or transferred to other Administrators, deceased, for which only the summary sheet has been received identifying the employer, or positive differences resulting from subtracting the balance from the contribution summaries.
38
46
2) Additional contributions to be cleared
Additional contributions and health insurance contributions of independent participants paid, for which the support sheets have not been received.
330
255
Total
368
301
The balance of pending contributions will be settled internally or by transferring those to other pension fund administrators. Beginning on January 1, 1998, these contributions are paid directly into the Pension Fund.
d.2. Comparative analysis of pending additional contributions
As of December 31,
Pending Additional Contributions
2013
2012
MCh$
MCh$
Beginning balance
46
46
Leftovers from the year
-
-
Cleared leftovers:
• For Provida
-
-
• Transferred to other AFPs
(8
)
-
Final Balance
38
46
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ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
e. Accounts payable to insurance companies
The accounts payables to insurance companies presented within line item “Trade and other payables” were MCh$86 and MCh$377 as of December 31, 2013 and 2012, respectively.
f. Assets arising from life and disability insurance payments
Receivables from insurance companies and the Government reflect payments made by Provida on behalf of the insurer and the Government. The reimbursements are made within 30 days and are classified as short-term receivable, as shown below. As required by law, records of total payments to the participant must be maintained by the insurance company as well as by Provida. Additionally, the self-insured portion of the disability is administered by the insurance company according to the law. Government reimbursements are guaranteed by law for employees who otherwise do not qualify for life and disability insurance.
f.1 Receivables from Insurance Companies
Receivables from Insurance Companies that are included under line item “Trade and Other Receivables” were as follows:
Provision at the date of information provided by the Insurance Company
Gross Provision at current year-end (not including financial revenues effects) (*)
Date
MCh$
To reported date
At
12-31-2013
MCh$
BBVA Seguros de Vida S.A. (**)
08-2003 to 12-2004
04/30/2011
92,368
92,199
92,199
-
-
BBVA Seguros de Vida S.A. (***)
01-2005 to 06-2009
12/31/2013
378,589
378,863
378,863
-
(3.667
)
Total
-
(3.667
)
(*)
Since Provida and BBVA Seguros de Vida S.A. are currently reviewing the final settlement of the insurance, a higher provision than the provision estimated by the insurance company has been determined taking into account the death fees’ claims payment incurred but not reported related to survival benefit claims to be provided where a deceased participant had a spouse and/or beneficiaries entitled to receive the survival benefits in accordance with current regulations.
(**)
The casualty rate of the policy subscribed with BBVA Seguros de Vida S.A. for August 2003 to December 2004 period was closed in April 2011. The casualty rate of such policy exceeded the maximum rate of 1.10%. Consequently the excess of costs for MCh$157 were assumed by such insurer.
(***)
Includes accrued premiums for a total amount of MCh$491 discounted from the balance payable to BBVA Seguros de Vida S.A. according to the respective contracts.
g.1 Reconciling costs and payments to the insurance companies
Sociedad Administradora de Fondos de Cesantía Chile S.A.
Chile
Chilean Peso
37.80
%
3,786
2,686
-
-
(4,970
)
1,502
Inversiones DCV S.A.
Chile
Chilean Peso
23.14
%
327
72
(36
)
-
-
363
Servicios de Administración Previsional S.A.
Chile
Chilean Peso
37.87
%
3,600
2,809
(1,660
)
-
(558
)
4,191
Afore Bancomer (2)
Mexico
Mexican Peso
7.50
%
10,220
4,262
(3,939
)
72
(10,615
)
-
AFP Horizonte (2)
Peru
Peruvian Soles
15.87
%
6,758
3,404
(2,660
)
(344
)
(7,158
)
-
Total
24,691
13,233
(8,295
)
(272
)
(23,301
)
6,056
(1) Provida has a direct equity interest of 37.80% and an indirect equity interest of 11.40%
(2) Provida exercised significant influence through its former controlling parent BBVA. In 2012, AFORE Bancomer and AFP Horizonte were reclassified as non-current assets and disposal groups held for sale. The sale of this investment occurred in the first quarter of 2013. The net gain on sale of AFORE Bancomer was MCh$38,755 and the net gain on sale of AFP Horizonte was MCh$26,834.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
13.2 Summarized total financial information of investments in associates
The following tables set forth summarized information of the investment in associates where Provida has significant influence as of December 31, 2013, and for those non-current assets and disposal groups held for sale their underlying major classes of assets and liabilities including the aggregated amounts of assets, liabilities, revenues and profit or loss as of December 31, 2012:
Sociedad Administradora de Fondos de Cesantía Chile S.A.
37.80
%
6,494
523
3,042
3,975
16,600
(9,492
)
7,108
Inversiones DCV S.A.
23.14
%
2
1,567
1
1,568
312
(2
)
310
Servicios de Administración Previsional S.A.
37.87
%
5,458
10,494
4,765
11,187
17,203
(9,787
)
7,416
AFORE Bancomer (1)
7.50
%
184,503
1,634
44,597
141,540
114,651
(57,815
)
56,836
AFP Horizonte (1)
15.87
%
25,540
44,262
24,710
45,092
41,791
(20,346
)
21,445
Total
221,997
58,480
77,115
203,362
190,557
(97,442
)
93,115
(1)
Investments classified as non-current assets and disposal groups held for sale
NOTE 14.
FINANCIAL INSTRUMENTS
14.1 Capital management
The constant objective of Provida is the efficient management of its working capital, maintaining significant and sufficient cash flows to fulfill its obligations.
The main use of Provida’s funds is for operating expenses related to employee remunerations, additional constitution of mandatory investments, dividend payments and other administration expenses. Provida has financed these requirements with cash flows generated from its operations, as well as, short-term debt.
Management believes that these sources of funds are sufficient to finance capital requirements and payments of its obligations. Due to the nature of the pension business, Provida obtains significant cash flows from fees received from mandatory and voluntary pension savings that are expected to maintain the same levels as those from previous years. Likewise, management estimates that the expected growth in Provida’s participants’ portfolio will continue increasing its working capital requirements, a situation in which Provida is well positioned to finance those requirements.
In terms of capital regulatory requirements, the AFPs must maintain a minimum equity expressed in UF, which is directly related to the number of participants that the AFPs have at the date of the financial statements. Provida is in the upper tranche due to maintaining a number exceeding 10,000 participants, which requires Provida to maintain a minimum equity of UF 20,000. As of December 31, 2013 and 2012, its equity expressed in U.F. was 7,020,584 and 11,085,767, respectively. Since its incorporation, Provida has complied with the minimum capital requirement.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
14.2 Financial instruments classified by nature and category
a) The detail of financial assets, classified by nature and category as of December 31, 2013 and 2012 are as follows:
As of December 31
2013
2012
MCh$
MCh$
Financial assets at fair value through profit or loss:
Mandatory investments (See Note 4 g.7. and Note 6)
234,929
217,072
Financial assets(*)
-
15,143
BBVA Mutual Fund (Money Market)
373
357
Financial assets AFP Génesis Ecuador (**)
4,078
4,805
(*) Time deposits with maturities of more than one year, which are designated at fair value.
(**) Includes mutual funds held at AFP Génesis Ecuador.
b) The detail of financial liabilities, classified by nature and category as of December 31, 2013 and 2012 are as follows:
Management considers that the carrying amounts of financial assets and liabilities recognized at amortized cost in the consolidated financial statements approximates their fair value.
The following table sets forth the carrying amount and fair value of financial assets and financial liabilities as of December 31, 2013 and 2012:
Financial assets at fair value through profit or loss:
Mandatory investments (See Note 7)
234,929
234,929
217,072
217,072
Financial assets(*)
-
-
15,143
15,143
BBVA Mutual Fund (Money Market)
373
373
357
357
Financial assets AFP Génesis Ecuador
4,078
4,078
4,805
4,805
Financial liabilities at amortized cost:
Interest-bearing borrowings
246
246
299
299
(*) Time deposits with maturities of more than one year, which are designated at fair value.
14.4 Fair value measurement
The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Level 1 – fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 – fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
Level 3 – fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).
(*) Term deposits with maturity of more than one year.
The Pension Law establishes that each AFP must maintain a reserve for mandatory investment equal to 1% of the net asset value of each pension fund under management. The mandatory investment that the administrator needs to maintain for the period between the second business day of the month in which the calculation is made and the first day of the next month after the calculation was made will be equivalent to 1% of the total of shares that represent the net asset value of each pension fund of the last day of the preceding month of the calculation date of the mandatory investment reserve. Therefore, the mandatory investment will increase or decrease on a monthly basis based on the calculation explained above. The investment in mandatory investment in each type of pension fund is valued on a daily basis, multiplying the number of fund shares invested in each type of fund by the value of the share on that day.
The Superintendency of Pensions publishes daily quotations of pension funds net asset value (NAV) at which redemptions or purchases of shares (units) occur without any adjustments to the published NAV. Redemptions and unit purchases take place regularly, between the participants that changes between funds and participants that changes between AFPs.
Based on paragraph AG71 of IAS 39 Financial Instruments: Recognition and Measurement which states that a financial instrument is regarded as quoted in an active market “if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis. Fair value is defined in terms of a price agreed by a willing buyer and a willing seller in an arm's length transaction”; and paragraph AG77 which states that the “initial acquisition or origination of a financial asset or incurrence of a financial liability is a market transaction that provides a foundation for estimating the fair value of the financial instrument”. Management has determined that the issuance and redemptions of the units in a fund represent market transactions occurring on an arm's length
basis.
Based on the above explanation and IFRS 7 paragraph 27A(a) which describes Level 1 classification as relating to “quoted prices (unadjusted) in active markets for identical assets or liabilities” we believe that mandatory investments comply with the definition to be classified as Level 1. As part of the application of IFRS 13 Fair Value Measurements we believe that our classification of mandatory investments has not changed since IFRS 13 defines an active market as a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis and considering the IASB basis of conclusions that although different words are used the definition of an active market is consistent with the definition in IAS 39.
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ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
No impairment losses were recognized when reclassifying the investments of such associates as held for sale.
The sale of these associates occurred in January 2013. The net gain on sale of AFORE Bancomer was MCh$38,755. The net gain on sale of AFP Horizonte was MCh$26,834.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19.
OTHER CURRENT AND NON-CURRENT ASSETS
Other current and non-current assets as of December 31, 2013 and 2012 are as follows:
The balance of this account as of December 31, 2013 and 2012 is presented as follows:
As of December,
2013
2012
Current
Non-Current
Current
Non-Current
MCh$
MCh$
MCh$
MCh$
Minimum Dividend (*)
42,616
-
10,232
-
Withholdings from pensioners (1)
3,860
-
3,740
-
Pensions payable (2)
1,845
-
1,967
-
Accounts Payable to the National Health Fund (3)
590
-
548
-
Trade payables
6,415
-
4,064
-
Collection to be cleared (Note 14 d.1)(**)
368
-
301
-
Other accounts payable
2,532
-
2,798
-
Total Trade and Other Accounts Payable
58,226
-
23,650
-
(*)
The balance as of December 31, 2013 and 2012, MCh$669 and MCh$244 are included as of December 31, 2013 corresponding to dividends declared as pending to be collected.
(**)
This balance included banking credits, interest, adjustment and collection costs for collection process without receiving payrolls, which are maintained in this account item until a clearance process is made.
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ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
In conformity with the requirements in D.L. 3,500, the Administrator must collect the independent participants’ health contributions and deduct health contributions from pensions financed by the Pension Fund and transfer these amounts to the Fondo Nacional de Salud (‘National Health Fund”) or the corresponding health insurance institution. Accordingly, balances in this item represent contributions collected that must be transferred to the National Health Fund or the respective health insurance institution. The detail for all periods presented is as follows:
For a description of the provision for employee benefits, see Note 5.1.2.
(2)
For a description of the provision for unfavorable casualty rate, see Note 5.1.1.
(3)
Other provisions include mainly provisions for advertising and provision for litigations related to pending labor lawsuits with former employees and other pension matters. See Note 33.d for further information. Additionally, the year 2013 included MCh$479 for replenishing a return difference in online transfers of funds made by participants as instructed by the Superintendency of Pensions.
It includes a 21.97% owned by MetLife Chile Acquisition Co and the remaining 4.13% is owned by other third parties.
24.2
Issued capital
The issued capital as of December 31, 2013, 2012and 2011 is represented by 331,316,623 authorized, subscribed in and no par value common shares equivalent to MCh$104,764 as of December 31, 2013, 2012 and 2011.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
24.3
Other reserves and accumulated other comprehensive income
The following tables set forth other reserves and accumulated other comprehensive income for the years ended December 31, 2013, 2012 and 2011 as follows:
Amounts recognized in accumulated other comprehensive income and in equity for non-current assets and disposal groups held for sale to be reclassified from equity to profit or loss at the time of disposal of these foreign investment in associates.
(1)
Exchange difference on translation:
Reserve for exchange difference on translation is used to record the difference arising from translating the financial statements of our foreign operations from their functional currencies to our presentation currency; and translation of goodwill arising from the acquisition of foreign operations with a functional currency other than the Chilean peso.
(2)
Miscellaneous other reserves
Miscellaneous other reserves include the following:
a)
On December 31, 2009, issued capital balance includes price-level restatement adjustments that were not reversed when adopted IFRS in 2009. Provida has elected not reverse to such price-level restatement adjustments based on Circular N°456 issued by the Superintendency of Securities and Insurance which indicates that deflation impacts shall not be applied to issued capital accounts as issued capital at the transition period to IFRS is established in the company´s bylaws which have been modified based on the distribution of the revalued equity, held at the annual shareholder´s meeting that approves such amount according to Article 10, section 2 of Chilean Corporations Law 18,046.
b)
Share of miscellaneous other reserves of associates accounted for using equity method.
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ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
24.4
Dividends
According to Provida’s by-laws, unless unanimously agreed otherwise by the shareholders of all issued shares, Provida must distribute a cash dividend for an amount equivalent to at least 30% of net profits for the year (Article 79 of Chilean Corporations Law).
At the Extraordinary Shareholders’ Meeting held on August 27, 2013 it was agreed to distribute a cash dividend against retained earnings from prior years of Ch$82.921 per share equivalent to MCh$27,473, which was paid on September 4, 2013.
At the Extraordinary Shareholders’ Meeting held on May 30, 2013, it was agreed to distribute a cash dividend against retained earnings from prior years of Ch$248.51 per share equivalent to MCh$82,335, which was paid on May 30, 2013. On May 30, 2013, a final dividend against profits for the year 2012 of Ch$214.00 per share equivalent to MCh$70,902 was agreed to at the General Shareholders’ Meeting held on April 30, 2013.
At the Board of Directors’ meeting held on September 26, 2012, it was agreed to distribute an interim dividend against profits for year 2012 of Ch$100.00 per share equivalent to MCh$33,132 which was paid on October 30, 2012.
On May 31, 2012, a final dividend against profits for year 2011 was paid in the amount of Ch$238.00 per share equivalent to MCh$78,855.
On October 28, 2011, an interim dividend against profits for the year 2011 was paid in the amount of Ch$61.87 per share equivalent to MCh$20,499.
On May 27, 2011, a final total dividend was paid in the amount of Ch$207.40 per share, charged to profits of the year 2010, equivalent to MCh$68,715.
Minimum dividends
The Board of Directors has agreed to pay dividends equivalent to at least 30% of profits for the year which is dependent on the fulfillment of the forecasted results of operations, cash flow requirements to finance mandatory investments and recurrent development of the company and the amount of profits for the year.
Minimum dividends are accrued at the end of each reporting period and are presented as a deduction of retained earnings. When the amount of interim dividends paid against profits for the year is less than the minimum dividend provision required, the difference will be accrued as a dividend payable.
As of December 31, 2013, the minimum dividend provision for the year was MCh$42,026.
As of December 31, 2012, the minimum dividend accrued for the year was MCh$10,189 corresponding to the difference accrued between the interim dividend of MCh$22,943 that was paid in year 2012 and the minimum dividend provision of MCh$33,132 required for the year 2012.
As of December 31, 2011, the minimum dividends accrued for the year was MCh$7,800 corresponding to the shortfall accrued between the interim dividend of MCh$20,499 that was paid in year 2011 and the minimum dividend provision of MCh$28,279 required for the year 2011.
Retained earnings as of December 31, 2013, 2012 and 2011 were MCh$136,280, MCh$210,453 and MCh$199,965, respectively.
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ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
Provida has entered into service contracts with different companies to complement management, operation and sale operations in its line of business. The relevant aspects of these contracts are indicated below:
Safe custody of securities and financial instruments of Provida Pension Funds and Mandatory Investments
b.1) Brown Brothers Harriman & Co.
Line of business: Banking
Type of service provided: Custody
Total expense recognized in profit or loss
349
516
589
b.2) Depósito Central de Valores S.A.
Type of service provided: Custody
Line of business: Safe custody of securities
Total expense recognized in profit or loss
814
729
681
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
c) Expenses for stock market transactions
The following expenses were incurred for stock market transactions for the years ended December 31, 2013, 2012 and 2011, which are included in the line item “Administration Expenses”.
d) Administration services and equipment maintenance
Provida has signed administration and maintenance equipment services contracts. The main services contracts are as follows:
d.1) Telefónica CTC Chile S.A. y Telefónica Empresas:
Telecommunications services have been contracted with these companies for long distance service, allowing signals transportation and the corresponding lines and equipments to provide such services. The total expenses included in "data processing expenses" and "administrative expenses" were MCh$91, MCh$102 and MCh$124 for the years ended December 31, 2013, 2012 and 2011, respectively.
d.2) Tata Consultancy Services BPO Chile S.A.
This company provides the following services:
Microfilm services and administration of archive and reception departments
This contract includes microfilming services of documents and the administration to the reception office and the archive unit. The total expenses included in "administrative expenses" were MCh$421, MCh$764 and MCh$405 for the years ended December 31, 2013, 2012 and 2011, respectively.
Design and management of centralized database
This contract includes contribution database management and security services of participants that have transferred to AFPs since 1981. Provida accesses and manages this database through a centralized query. The agreement was signed on March 1, 2000. The total expenses included in “administrative expenses” were MCh$0, MCh$0 and MCh$42 for the years ended December 31, 2013, 2012 and 2011, respectively.
Agreement for supplying digital documents
This agreement includes the implementation of an information capture process for participant contribution forms and other documents related to Provida’s operations, using digital imaging technology in general forms. The total expenses included in “administrative expenses” were MCh$103, MCh$9 and MCh$20 for the years ended December 31, 2013, 2012 and 2011, respectively.
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ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
d.3) Agreement of rental and maintenance of equipments
Coasin Chile Ltda.
This agreement includes contracts of equipment maintenance. The total expenses included in “administrative expenses” were MCh$275, MCh$50 and MCh$122 for the years ended December 31, 2013, 2012 and 2011, respectively.
Nielsoft Informática Ltda.
This agreement includes contracts of system maintenance. The total expenses included in “administrative expenses” were MCh$288, MCh$635 and MCh$523 for the years ended December 31, 2013, 2012 and 2011, respectively.
d.4) Jordata Ltda.
This agreement considers the information capture process for participant contribution forms and other documents related to Provida’s operations. The total expenses included in “administrative expenses” were MCh$0, MCh$0 and MCh$5 for the years ended December 31, 2013, 2012 and 2011, respectively.
This agreement includes providing services of pension payments and saving withdrawals through a contract entered into with BBVA Chile S.A. on February 1, 2003. The price for the services is UF 0.044 (VAT included) for transactions between 0 and 25,000 for savings payments, and UF 0.031 (VAT included) for transactions exceeding 25,000 for pension payments. The total expenses included in "administrative expenses" were MCh$215, MCh$223 and MCh$170 for the years December 31, 2013, 2012 and 2011, respectively.
This contract began on April 24, 2009 and is related to services of pension payments made through Servipag. The total expenses included in "administrative expenses" were MCh$546, MCh$710 and MCh$998 for the years ended December 31, 2013, 2012 and 2011, respectively.
This contract began on March 31, 2010 and is related to services of pension payments made through Banco Estado. The total expenses included in "administrative expenses" were MCh$304, MCh$223 and MCh$236 for the years ended December 31, 2013, 2012 and 2011, respectively.
Contract entered into with Caja de Compensación Los Andes
This contract began on August 8, 2011 and is related to services of pension payments made through Caja de Compensación Los Andes. The total expenses included in "administrative expenses" were MCh$57, MCh$55 and MCh$8 for the years ended December 31, 2013, 2012 and 2011, respectively.
Contract entered into with Caja de Compensación Los Héroes
This contract began on September 27, 2011 and is related to services of pension payments made through Caja de Compensación Los Héroes. as the total expenses included in "administrative expenses" were MCh$362, MCh$178 and MCh$0 for the years ended December 31, 2013, 2012 and 2011, respectively.
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ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
This contract includes mailing services with AMF and Correos de Chile for delivering the quarterly individual capitalization account balance to the participants and has been effective since September 2005 and March 2003, respectively. The total expenses included in "administrative expenses" were MCh$1,266, MCh$1,031 and MCh$952 for the years ended December 31, 2013, 2012 and 2011, respectively.
d.7) Other minor services
Other contracts with EFCO Servicios Generales S.A., Central de Restaurantes Aramark (for cleaning offices services), Comunicaciones Capitulo (telephone line), Imac (air conditioning) and Thyssenkrupp (elevators), resulted in costs recognized as “administrative expenses” amounting to MCh$439, MCh$274 and MCh$308 as of December 31, 2013, 2012 and 2011, respectively.
NOTE 26.
DISAGGREGATION OF REVENUES AND EXPENSES BY FUND TYPE
The following is a breakdown of operating revenues and expenses by fund type for the years ended December 31, 2013, 2012 and 2011:
Gains on sale of investments in associates (AFORE Bancomer and AFP Horizonte) (See Note 18)
65,589
-
-
Rentals
1,620
1,741
1,843
Gains on sales of assets
997
1,761
560
Other
388
1,399
647
Total
68,594
4,901
3,050
NOTE 31.
CONTINGENCIES AND RESTRICTIONS
a)
Guarantees given:
AFP Provida, as authorized at the extraordinary shareholders’ meeting held on January 7, 2002, had guaranteed a debt of UF 400,000 (MCh$9,324) to its equity method investee Administradora de Fondos de Cesantía de Chile S.A. (AFC Chile). The debt was incurred so that AFC Chile could comply with certain requirements of the Unemployment Insurance Administration which may include, but are not limited to, standby letters of credit. The guarantee given by AFP Provida stated that it became warrantor and joint co-signer exclusively for 37.8% of the aforementioned amount intended to cover any eventual payments of bank guarantee letters signed by Administradora de Fondos de Cesantía de Chile S.A., in addition to the respective promissory notes.
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ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On February 4, 2010, the Administradora de Fondos de Cesantía reimbursed Provida with bank guarantee letters for UF 160,000 (MCh$3,730), thus the remaining amount of UF 240,000 (MCh$5,594) was guaranteed by AFP Provida. Through Official Letter No. 0227 dated August 22, 2012, Sociedad Administradora de Fondos de Cesantía de Chile S.A. was requested to replace the bank guarantee letters expiring on April 25, 2013 by other guarantee letters for the same value equivalent to UF 240,000 (MCh$5,594) and effective until January 31, 2014.
On March 26, 2013, AFC Chile settled its obligations to the issuer of the guarantee letters for a total of UF 240,000 (MCh$5,594) releasing Provida as warrantor and joint co-signer.
The contract with AFC Chile ended on October 7, 2013, which initiated the process of liquidation of AFC Chile. At the Extraordinary Shareholders meeting of AFC Chile held on November 7, 2013, a liquidation commission of four members was designated to complete such process which will be finalized in a period that shall not exceed three years. The entire liquidation process will be overseen and the final authorization to liquidate AFC Chile will be granted by the Superintendency of Pensions.
b)
Disability and Survival Pensions and Life Annuities
Article 82 of D.L. 3,500 of 1980 established that when an insurance company does not fulfill obligations originating from signed contracts, the State Guarantee will cover the minimum fixed income defined in Articles 73, 77 and 78. For income or pensions exceeding those amounts, the State Guarantee will cover 75% of the excess, with a maximum of UF 45 (MCh$1).
Provida’s contingency is approximately UF 914,019 (MCh$21,305). The basic assumptions of this calculation made on pensions generated before January 1, 1988 are based on a life expectancy of 28 years for pension beneficiaries, an annual discount rate of 5% and the application of the previously mentioned State Guarantee. Pension fund participants’ claims against insurance companies would be subject to the privilege established in Article 2,472, No 4 of the Civil Code.
AFP Provida maintains an insurance contract with BBVA Seguros de Vida S.A. effective January 1, 2005 to December 31, 2009 with payment rates described in Note 12. b), establishing an adjustment in the insurance rate in accordance with variations of casualties and monthly pre-payments of financial revenues.
On June 30, 2013, AFP Provida received UF 32,288.96 (MCh$753) from the insurance company BBVA Seguros de Vida corresponding to the January 2005-June 2009 period.
On June 30, 2012, AFP Provida received UF 115,574.35 (MCh$2,694) from the insurance company BBVA Seguros de Vida corresponding to the January 2005-June 2009 period.
d) Litigation or other actions in which the company is involved:
As of December 31, 2013, there are labor litigations against Provida filed by former employees in various courts throughout the country. In the opinion of the in-house Legal Counsel, the outcome of these litigations should not have a significant unfavorable effect on Provida’s results.
Additionally, there are pending lawsuits related to pension matters in certain courts whose outcome in the opinion of the in-house Legal Counsel should not have a significant effect on Provida’s results.
Nevertheless, it is probable that an outflow or resources embodying economic benefits will be required to settle the lawsuits and a sufficiently reliable estimate of the obligation was made and recognized for MCh$284 as of December 31, 2013.
ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 33.
SANCTIONS
a) From the Superintendency of Pensions:
According to Resolution N°92 of October 17, 2013, the Superintendency of Pensions applied a fine of UF 400 (MCh$9) for irregularities in the information submitted to the Social Pension Institute (IPS) that entitle and grant young workers with pension subsidies.
According to Resolution N°79 of October 8, 2013, the Superintendency of Pensions applied a fine of UF 800 (MCh$19) for irregularities in accrediting certain participants’ contributions electronically paid.
According to Resolution N°47 of July 17, 2013, the Superintendency of Pensions applied a fine of UF 200 (MCh$5) for acquiring shares of an investment fund directly from the issuer which did not qualify as fund participant.
According to Resolution N°46 of July 12, 2013, the Superintendency of Pensions sent an admonition for noncompliance with current regulation on overdrafts in bank checking accounts as established in Circular Note N°5,875.
According to Resolution N°44 of July 3, 2013, the Superintendency of Pensions applied a fine of UF 400 (MCh$9) for noncompliance with current regulation on currency matters.
According to Resolution N°21 of March 21, 2013, the Superintendency of Pensions applied a fine of UF 1,000 (MCh$23) for noncompliance with certain sections within its Compendium Standards related to granting early retirement pension benefits.
According to Resolution N°14 of January 29, 2013, the Superintendency of Pensions applied a fine of UF 200 (MCh$5) for noncompliance with current regulation on shareholders’ meetings attendance.
According to Resolution N°100 of December 27, 2012, the Superintendency of Pensions sent an admonition for noncompliance with current regulation on information of fee payments from pension funds for investments made in investment vehicles.
According to Resolution N°94 of December 19, 2012, the Superintendency of Pensions applied a fine of UF 200 (MCh$5) for noncompliance with current regulation on currency matters.
According to Resolution N°69 of October 9, 2012, the Superintendency of Pensions sent an admonition for breaking the ruling regulation established in Articles 4 bis, 12, 69 first and second clauses in relation to Articles 17, second clause, 54, and 59 within Decree Law 3,500 of 1980, when determining charges and payments of the life and disability insurance premium.
According to Resolution N°53 of August 21, 2012, the Superintendency of Pensions applied a fine of UF 400 (MCh$9) for irregularities in the treatment of transferring funds from IPS (Social Pension Institute) for payments of APS (Solidarity Pension Contributions).
According to Resolution N°40 of June 6, 2012, the Superintendency of Pensions applied a fine of UF 200 (MCh$5) for breaking the ruling regulation by purchasing a bond first issued from JP Morgan Chase Bank of ISIN XS624807698 on June 21, 2011, an instrument that at that date was not eligible for pension funds.
According to Resolution N°34 of June 6, 2012, the Superintendency of Pensions sent an admonition to inform to the Social Pension Institute a factor actuarially wrong regarding its participants, which provoked an alteration in the solidarity pension contribution paid to them.
According to Resolution N°17 of February 9, 2012, the Superintendency of Pensions applied a fine of UF 200 (MCh$5) for irregularities in the electronic transmission of certificates to SCOMP.
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ADMINISTRADORA DE FONDOS DE PENSIONES PROVIDA S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
According to Resolution N°15 of February 7, 2012, the Superintendency of Pensions applied a fine of UF 200 (MCh$5) for omitting a forward contract for Fund Type C, and recording a forward contract as the sale of Mexican Pesos against Chilean Pesos, but the contract was a purchase of foreign currency related to national currency.
According to Resolution N°7 of January 30, 2012, the Superintendency of Pensions sent an admonition for failure to attend shareholder’s meetings of Fintesa Securitizadora S.A. held on February 10 and March 11, 2011, not being exempt, as per regulations of Book VI, title IX, Letter A, Chapter I, article IV of the Compendium of Rules issued by the Pension Superintendency.
b) From other administrative authorities:
As of December 31, 2013, 2012 and 2011, AFP Provida has received sanctions from other administrative authorities for MCh$52, MCh$0, MCh$0, respectively.
NOTE 34.
EVENTS AFTER THE REPORTING PERIOD
At the date of issue of these financial statements, there have been no events that could materially affect these financial statements.
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Dates Referenced Herein and Documents Incorporated by Reference
